On 7 January, the UK Treasury published a consultation on its proposed approach to regulating stablecoins.  Although the title of the consultation includes “cryptoassets” – this is the just first stage in the consultative process for cryptoassets, which focuses on stablecoins referred to as “stable tokens”. The consultation closes on 21 March. For US readers, a “consultation” is the start of regulatory process, not unlike an “Advance Notice of Proposed Rulemaking” or “ANPR” in the US.  The UK government sets out the supervisory perimeters, seeking input from the public, and leaving the detailed requirements to be designed by the regulators. Accordingly, the consultation discusses only general principles and the overall framework.

We summarise the key points here.

• Stable tokens to be regulated are tokens which could be “reliably used for retail or wholesale transactions”; essentially, tokens that are linked to specific assets (e.g. fiat currency) for stabilisation. What is commonly known as “algorithmic stablecoin” (those that use algorithms to balance the circulating supply) will for now remain outside scope of the proposed stable token regulations.

Note that out-of-scope tokens may nonetheless be made subject to restrictions on marketing or promotion (which is being separately regulated).

• Five activities in relation to such stable tokens will be made subject to a new authorisation (or licensing)  regime; namely, issuing/destroying tokens, managing stabilisation and reserve, providing custody and administration for third parties, executing payments using tokens, exchanging tokens for fiat and vice versa.

Further, issuing/destroying tokens referencing a single fiat currency will be clarified as issuing e-money or regulated payment services, and thus subject to the current authorisation regime (with necessary modifications).

Other activities, albeit not to be “authorised”, may be made subject to supervisory regimes for payment systems (e.g. if systemically important).

• The new authorisation regime will be based on the current payment services/e-money regime, with similar exclusions such as for closed loop products, and a lighter regime for small firms.

The UK consultation also seeks views on broader subjects such as use of DLT-based market infrastructures and the concept of Decentralised Finance. 

Many view the UK consultation as another broader step in the global regulatory community to control the risks posed by digital assets, while harnessing the benefits, such as improved efficiencies, lower costs and greater financial inclusion.

US regulators have also proposed regulation of stablecoins, although in a manner which has drawn criticism as being much too stringent  in that it appears to limit stablecoin issuance to chartered banks.  The approach taken by the UK Treasury would seem to be more flexible and foster greater innovation.