As the UK aims to become a global hub for crypto assets and services, The Treasury (HMT) has attempted to create conditions for the usage of digital settlement assets so the UK can effectively regulate stablecoins as they become more accessible and frequently used by businesses and consumers.

The purpose of HMT’s most recent consultation on Managing the Failures of Systemic Digital Asset Firms is to bring stablecoins into the UK’s wider regulatory approach for financial services. This will be done alongside other publications and consultations, for example through the definition of digital settlement assets in the Financial Services and Markets Bill as well as through the wider intended changes that will be brought about in the ‘Payments Regulation and the Systemic Perimiter’ consultation.

UK Finance recently responded to HMT’s consultation on managing the failures of systemic digital assets and we are engaging with our members on the other consultations to provide a response on behalf of the industry. 

This consultation by HMT is incredibly significant in future-proofing the UK’s financial ecosystem as stablecoins and other digital settlement assets become adopted as a means of payment.

A stablecoin is a digital currency that is pegged to a reserve asset. This could be a singular fiat currency (such as sterling), a basket of fiat currencies (such as the US dollar or euro), or a commodity/basket of commodities such as gold.

Stablecoins are an attractive form of digital asset. Given the volatility of some cryptoassets such as bitcoin, having an alternative mode of digital asset that is connected to a material object such as fiat currencies helps to increase the stability of an asset should a consumer wish to partake in the market. More widely, the stablecoin legislation through the Financial Services and Markets Bill sets out the foundations for greater regulation for digital currencies.

While there is an appreciation that the UK government is driving forward to digital financial regulation, we are a while away from systemic stablecoins becoming a widespread reality for the majority of consumers. With the financial services industry increasingly under pressure from consumers to offer digital products and services, there is a need for regulators to come up with uniform definitions and a more transferable taxonomy for different types of digital assets so the industry can effectively plan for the future.

Here at UK Finance, we have attempted to decode what the current publication looks like and what the intended consequences would be at this stage.

The publication seeks to reuse the current Financial Markets Infrastructure (FMI) SAR in the circumstance of a systemic Digital Settlement Asset (DSA) firm going insolvent. Using the same activity, same risk, same regulation principle, the government is outlining its plans to ensure systemic DSA firms are treated in the same way as other systemic firms in the financial services industry.

This seems a positive step. It will put stablecoins on the same footing as other more traditional types of money, such as commercial bank or electronic (e-money) which should increase interest among financial service providers in contributing and becoming involved in the DSAs market.

However, in our response to the consultation we highlighted that there was still more consideration needed on ensuring consumer funds were refunded directly in the case of insolvency. At present, the Financial Services Compensation Scheme (FSCS) is normally used to protect against the insolvency of a bank, and safeguarding for e-money, not loss of the right to the deposit (which in this case would be the stablecoin token).

Should the FSCS not be fully extended to protect consumers and if the consumer loses their right to the deposit because a stablecoin FMI is insolvent, the consumer will need to know they have an equivalent protection for them to remain confident in accessing stablecoins.

The UK needs to ensure that the right incentives and requirements exist for stablecoin issuers, wallet service providers and custodians to succeed, whether these are electronic money institutions or banks. If regulation is appropriate, then participants offering DSA facilities will have the freedom to provide innovative services to attract consumers while ensuring confidence among consumers that their deposits will be protected.