UK regulatory approach to

cryptoassets, stablecoins, and

distributed ledger technology in
financial markets:
Response to the consultation and call for
in title heading:
evidence

April 2022
UK regulatory approach to
cryptoassets, stablecoins and
distributed ledger technology in
financial markets:
Response to the consultation and call for
evidence

April 2022
© Crown copyright 2022

This publication is licensed under the terms of the Open Government Licence v3.0 except
where otherwise stated. To view this licence, visit nationalarchives.gov.uk/doc/open-
government-licence/version/3.

Where we have identified any third party copyright information you will need to obtain
permission from the copyright holders concerned.

This publication is available at: www.gov.uk/official-documents.

Any enquiries regarding this publication should be sent to us at

[email protected]

ISBN: 978-1-911686-81-1 PU: 3206

Contents

Executive Summary 2

Chapter 1: Introduction 4

Chapter 2: The government's approach to stablecoins 7

Chapter 3: Call for Evidence on investment and wholesale uses 24

Chapter 4: Unregulated tokens and new market developments 34

1
Executive Summary
In January 2021, HM Treasury launched a Consultation and Call for Evidence on the
regulatory approach to cryptoassets and stablecoins and the use of distributed
ledger technology (DLT) in financial markets.

It set out the position that certain cryptoassets and DLT could drive transformational
changes in financial markets and offer consumers new ways to transact and invest,
but could also pose risks to consumers, market integrity and the stability of the
financial system.

The government’s consultation sought views on how the UK can ensure its
regulatory framework is equipped to harness such benefits, supporting the adoption
of cutting-edge technologies, while mitigating the potential risks.
Through its consultation, the government proposed a staged and proportionate
approach to cryptoasset regulation, which is sensitive to risks posed and responsive
to new developments in the market.

This response document confirms the government’s intention to take the necessary
legislative steps to bring activities that issue or facilitate the use of stablecoins used
as a means of payment into the UK regulatory perimeter, primarily by amending
existing electronic money and payments legislation. The rationale for doing this is
that certain stablecoins have the capacity to potentially become a widespread means
of payment including by retail customers, driving consumer choice and efficiencies.
It is, further, the government’s intention to consult later this year on regulating a
wider set of cryptoasset activities, in view of their continued growth and uptake
worldwide.

The government welcomes the work happening at international level on the

regulation of cryptoassets, including stablecoins, and the UK continues to take a
leading role in international fora. The government will ensure sufficient flexibility is
built into the UK’s regulatory framework to allow regulators to adapt rules and
requirements as international work concludes, benefiting too from the agility that
will be afforded to UK financial services legislation by the Future Regulatory
Framework.

The basis of the government’s proposal to bring stablecoins where used as a means
of payment within the UK regulatory perimeter is broadly as follows:

a. The framework in the UK for e-money through the Electronic Money

Regulations 2011 and Payment Service Regulations 2017 provides a robust
foundation for payment firms in the UK. Although it does not today provide
an explicit regime for regulating stablecoins, the government considers that
an amended e-money framework can deliver a consistent framework to
regulate stablecoin issuance and the provision of wallets and custody
services. Establishing a regulatory environment for stablecoins used as
payment simultaneously creates a basis to enable market entry to support
innovation, while ensuring that appropriate regulatory standards apply for
the benefit of customers, market integrity and stability.

2
 b. In addition, the government plans to extend the applicability of Part 5 of the
Banking Act 2009 to include stablecoin activities, to apply in cases where the
risks posed have the potential to be systemic and so the threshold for Bank
of England supervision is met. For entities authorised by the Financial
Conduct Authority (FCA) and recognised under the Banking Act, the Bank of
England will be the lead prudential authority.

c. To ensure effective competition continues to be a central aspect of the UK’s

approach to financial services and future technological innovation, the
government is of the view that it is also necessary to extend the scope of the
Financial Services (Banking Reform) Act 2013 in order to ensure relevant
stablecoin-based payment systems are subject to appropriate competition
regulation by the Payment Systems Regulator (PSR).

Taken together, these changes will create the conditions for issuers and service
providers of stablecoins used as a means of payment to operate and grow in the UK,
in line with the government’s firm commitment to place the UK’s financial services
sector at the forefront of cryptoasset technology and innovation. For consumers,
bringing stablecoins into the regulatory framework means they will be able to use
stablecoin services with confidence. The government will introduce this legislation
when Parliamentary time allows, to deliver a world-leading regulatory regime for
stablecoins.

The government also conducted a Call for Evidence on the investment and
wholesale uses of DLT in financial markets. The government recognises the
substantial benefits and transformative impact that could be delivered by DLT when
adopted in Financial Market Infrastructures (FMIs), though the process of adopting
these technologies needs to be managed carefully to ensure that any new risks
arising are appropriately addressed. The government intends to support industry in
ensuring that regulations can accommodate tokenisation and DLT in FMIs, and is
developing an FMI Sandbox (to be up and running in 2023) to support firms
wanting to innovate, including by using these technologies to provide FMI services.
The government intends to work collaboratively with regulators and industry to
identify and manage any issues relating to the adoption of DLT.

The government also posed broad questions on the role of other forms of
cryptoassets used primarily as retail investments and the growth of decentralised
finance. The government’s planned consultation on cryptoasset regulation will set
out proposals for these innovations, reflecting feedback received.

3
Chapter 1
Introduction
1.1 In January 2021, HM Treasury launched a Consultation and Call for Evidence
on the regulatory approach to cryptoassets and stablecoins. The government’s
consultation sought views on how the UK can ensure its regulatory framework is
equipped to harness the benefits of new technologies, supporting innovation and
competition, while mitigating risks to consumers, market integrity and financial
stability. Proposals were informed by views from the UK’s Cryptoassets Taskforce 1,
which was established in 2018 with a mandate to consider the risks and benefits
posed by cryptoassets and distributed ledger technology (DLT) in the UK, and to advise
on the appropriate regulatory response.

1.2 In total, the government received 89 responses from a broad range of

organisations, industry trade bodies, universities and individuals.

1.3 Since the consultation was launched, the cryptoasset market has continued to
develop at pace, with the total market capitalisation for cryptoassets estimated to
have reached between $2.6-3 trillion in 2021 and falling over recent months to $2
trillion.2 While decentralised finance remains relatively small, it is nonetheless growing
fast, from less than $10bn at the start of 2020 to nearly $100bn in September 2021.3
Consumer research from the Financial Conduct Authority (FCA) suggests the uptake
of cryptoassets among UK consumers has also continued to increase, with 2.3 million
adults now estimated to hold cryptoassets (up from 1.9 million last year).4 Global
policymakers have also noted its growing interconnectedness with the wider financial
system.5

1.4 The government considers that clear and proportionate regulation is essential
to fostering competition and innovation in a fast-evolving sector. Against this
backdrop, the government and regulatory authorities have already taken (or are in the
process of taking) a number of steps to address the most pressing gaps in the
regulatory framework—

a. Implementing a new anti-money laundering and counter terrorist financing

(AML/CTF) regime for cryptoassets6; and proposing amendments to
implement the Financial Action Task Force (FATF) “travel rule” for transfers of
cryptoassets.7 HM Treasury is considering submissions to its recent
consultation and will publish a future response;

1 Membership includes senior representatives from the Bank of England, Financial Conduct Authority and HM
Treasury. It is also attended by the Payments Systems Regulator.
2 According to online sources CoinGecko and Coinmarketcap.com, but are unverified.
3 See https://www.bankofengland.co.uk/speech/2021/october/jon-cunliffe-swifts-sibos-2021
4 See https://www.fca.org.uk/publications/research/research-note-cryptoasset-consumer-research-2021
5 See for example: https://www.imf.org/-/media/Files/Publications/GFSR/2021/October/English/ch2.ashx
6 See https://www.fca.org.uk/firms/financial-crime/cryptoassets-aml-ctf-regime
7 See https://www.gov.uk/government/consultations/amendments-to-the-money-laundering-terrorist-financing-and-
transfer-of-funds-information-on-the-payer-regulations-2017-statutory-instrument-2022

4
 b. Confirming the intention to extend the scope of the UK’s financial promotions
regime to cryptoassets;8

c. Addressing consumer risk through regulator consumer warnings and

increasing overall consumer education about crypto investments.

1.5 In terms of future regulatory development, the government proposed in its

consultation a staged and proportionate approach to regulation, which was sensitive
to risks posed, and responsive to new developments in the market. In particular, the
consultation highlighted that newer-developing forms of cryptoassets – stablecoins –
had the potential to develop into a widespread means of payment, and potentially
deliver improvements in payments transactions, especially for cross-border
transactions. At the same time, depending on scale and the nature of their use, they
could pose similar financial stability and consumer risks as traditional regulated
payments. In this regard, stablecoin has a potential ‘mainstream’ use that is distinct
from other forms of cryptoasset (which are more akin to a form of investment than a
means of payment).9

1.6 The government therefore intends to bring activities facilitating the use of
certain stablecoins, when used as a means of payment, into the UK regulatory
perimeter. This will be done primarily by amending existing payments legislation,
enabling the UK’s regulators to set firm-facing requirements in a framework set by
government and Parliament. In line with the government’s staged approach to
regulation, it is likely that future regulation will be needed for the wider market in
cryptoassets, to respond to growing developments in the sector and to facilitate
responsible innovation. The government will therefore consult later this year on
bringing wider forms of cryptoasset activity within the UK regulatory perimeter.

1.7 The government also conducted a Call for Evidence on the investment and
wholesale uses of tokenisation and DLT in financial markets. The government
recognises the substantial benefits that could be delivered by DLT when adopted in
FMIs, particularly in enabling greater efficiency, transparency and resilience. However,
the adoption of DLT in FMIs could lead to a fundamental change in existing structures
and practices, such as for trading venues undertaking settlement activities, though
the scale and nature of these changes could present substantial challenges and would
need to be managed carefully.

1.8 The government intends to support industry in ensuring that current

legislation and regulation is adapted to accommodate tokenisation and DLT in FMIs,
whilst ensuring that broad regulatory outcomes are still met, and on the basis that
legislation should be technology neutral. To aid this, the government will implement
a Financial Market Infrastructure Sandbox, which will be up and running in 2023. The
FMI Sandbox will support firms wanting to use technologies such as DLT to provide
FMI services; this may include, for example, entities being provided with modifications
to existing legislation, rules and standards where they act as a barrier to adoption.
The Sandbox will enable the government and regulators to understand what changes
need to be made to legislation (both to enable the adoption of new technology and

8 See: https://www.gov.uk/government/consultations/cryptoasset-promotions
9 For example, the Government’s consultation (p.13-14) observed that 27% of stablecoin owners have
used them to purchase goods and services, compared with nearly half (47%) of UK cryptoasset
consumers who said they bought cryptocurrencies ‘as a gamble that could make or lose money’. 89% of
these respondents understood that cryptoassets were not subject to regulatory protections.

5
to manage any new risks) and ensure they can implement any changes and additional
requirements.

1.9 The government intends to work collaboratively with regulators and with
industry to identify and manage any further issues relating to the adoption of DLT,
particularly when considering the impact of DLT on existing market structures and
practices. The government also recognises the importance of common standards in
facilitating DLT and will consider with industry how to take work forward here both
domestically and internationally.

1.10 The government also posed broad questions on the role of other forms of
cryptoassets used primarily as retail investments and the growth of decentralised
finance. The government’s planned consultation on cryptoasset regulation will set out
proposals for these innovations, reflecting feedback received.

1.11 The remainder of this document is split broadly into two. The first half outlines
the government’s overall policy approach to cryptoassets and the government’s
proposed regulatory regime in relation to stablecoin, where used as a means of
payment, specifically. The second half of the document sets out the government’s
response to feedback on proposals to support the use of DLT in financial markets.

6
The government’s approach to stablecoins
Bringing stablecoins, where used as a means of payment,
into the regulatory perimeter
2.1 Through the government’s consultation on stablecoins, a number of broad
themes emerged:
a. A broad consensus on the need for international coordination of
regulation, and close collaboration with other jurisdictions.

b. General agreement that a UK regulatory framework for stablecoins needs

to be flexible enough to respond to rapid innovation, though some
respondents requested a more detailed taxonomy, in light of the differing
uses of stablecoins.

c. General agreement that systemically important entities (e.g. systemic

stablecoin issuers and wallets) should be subject to Bank of England
regulation, with respondents seeking further guidance on the thresholds
for reaching systemic status.

d. Broad agreement that stablecoins referenced to a single currency should

be subject to similar requirements as e-money, though a number of
respondents highlighted that some current or proposed business models
would not currently meet these regulatory standards.

e. A wide variety of views on the approach to ‘unbacked’ cryptoassets other

than stablecoins, e.g. Bitcoin, some called for further regulation (for
example, market abuse and prospectus-type rules); others argued that
unbacked cryptoassets should not be subject to further financial services
regulation given their unique qualities.

2.2 Through the consultation, the government also sought areas of specific and
targeted feedback, including on how to classify cryptoassets, including stablecoin, in
UK regulation. The consultation noted the FCA’s 2019 publication, ‘PS19/22 Guidance
on cryptoassets’10, which described three broad categories of token: e-money tokens,
security tokens and unregulated tokens – exploring if these terms should continue to
be adopted, and if a new category of ‘stable tokens’ should be additionally created.
This new category of token would refer to tokens which stabilise their value by
referencing assets such as fiat currency (i.e. those commonly known as stablecoins)
and could more reliably be used as a means of exchange or store of value.

2.3 The majority of respondents supported the proposal to continue using a

classification that is broadly consistent with existing guidance issued by UK authorities.
Respondents also supported supplementing existing guidance with new categories
where it is appropriate. Respondents agreed with the government's proposal to

10 https://www.fca.org.uk/publication/policy/ps19-22.pdf

7
develop a UK taxonomy, while urging the government to ensure international
cohesion and support consistent definitions and a common understanding.

In its 2021 consultation, the government asked for views on:

1. Continuing to use a classification that is broadly consistent with existing

guidance issued by UK authorities, supplemented with new categories
where needed.
2. The proposed new regulated category of ‘stable tokens’.

2.4 Respondents also observed that given the rapidly evolving market and hybrid
nature of many tokens, it was important that any classification be sufficiently flexible.
Feedback highlighted the importance of having the ability to further adapt
classifications to reflect definitions adopted at the international level. Despite this
desire for flexibility, there were also a number of calls for more granular
categorisation, with the flexibility to update guidance as new models or uses emerge.
Some respondents noted that some existing uses were not covered in the categories
discussed in the consultation – or should be explicitly carved from scope. Examples
given included deposits recorded on DLT, settlement tokens, and hybrid tokens.

2.5 For stablecoin specifically, some respondents questioned the use of ‘stable
token’ instead of the more widely accepted term ‘stablecoin’. They also noted the
different characteristics and risks presented by tokens which maintain a stable value
(e.g. between tokenised forms of central bank money and privately issued tokens
which reference their value from other assets). Respondents highlighted that different
stablecoins may require a different regulatory treatment and that the UK regime
should account for that. Similarly, some respondents called for a clearer delineation
between stablecoins which are linked to a fiat currency and stablecoins which
reference other assets.

2.6 Respondents also highlighted the importance of a clearly defined scope for
consumers and market participants seeking to navigate the UK’s regulatory
framework. Respondents also queried the regulatory treatment of a number of
different stablecoins.

2.7 Following consideration of the responses, the government maintains its

position that, in a fast-growing and nascent area of financial services, the regulatory
framework for cryptoassets and classifications ought to be designed with flexibility,
since static classification or definitions could quickly become outdated. In designing
that flexibility, however, the government recognises that clarity must be achieved to
ensure that market participants are able to identify where activities fall within the
perimeter and the requirements and obligations that this entails.

2.8 The government considers that some forms of digital money or tokens – for
example, those intended for wholesale settlement – may already fall within the
relevant UK legal frameworks. However, this also depends on the structure of the
token and nature of the activities concerned.

8
2.9 Future legislation will provide a clear framework in the UK, providing clarity as
to the scope of activities to which the regime applies. The government expects this to
be supplemented by further detailed information on activities and tokens in scope
from the relevant financial regulators.

2.10 With respect to stablecoin used as a means of payment specifically, the

government proposes that the regulation should capture all stablecoins that reference
fiat currencies, including a single currency stablecoin or stablecoin based on a basket
of currencies. This takes on board arguments made about the diversity of models and
uses of stablecoins, and the government’s priority to regulate those that have the
capacity to potentially develop into a widespread means of payment. In light of
stakeholder feedback and the desire for more commonly understood methodology,
the government has also decided to adopt the terminology of ‘stablecoin’.11

2.11 The government will also continue to work closely with international partners,
to harmonise guidance and concepts where possible. The government has sought to
reflect the Financial Stability Board’s (FSB) recommendations on the regulation,
supervision and oversight of global stablecoin arrangements12, and the CPMI-IOSCO
consultative report13 on the application of the Principles for Financial Market
Infrastructures to stablecoin arrangements, and will leave room to update the
regulatory framework as international standards are developed.

2.12 Greater flexibility to maintain the UK’s regulatory regime will also be supported
by the introduction of the Future Regulatory Framework, which will make it easier to
adjust retained EU law and give the ability to regulators to set regulatory rules instead
of relying on prescriptive, inflexible legislation. This will extend to the FCA’s regulatory
framework for payments services and e-money (including once stablecoin activities
are brought into that regime), creating a regulatory framework that can better adapt
as the market develops.

Objectives, principles and design

2.13 The government’s consultation sought views on a number of objectives and
principles to guide the design of the UK’s regulatory regime for stablecoins and
understand the respective priorities in order to promote competition, innovation and
support UK competitiveness; protect financial stability and market integrity; and
deliver robust consumer protection.

2.14 In addition, the consultation sought feedback on the proposal that the
government should broadly define the scope of the regulatory perimeter, objectives
and principles in statute, with detailed rules provided by the UK’s independent
regulators.

2.15 A question was also asked on what, if any, location requirements should apply
to entities subject to the new regulatory framework.

11 For the avoidance of doubt, this expression is not intended to bear a relation to references to “coin” or “coinage”
present in other legislation.
12 https://www.fsb.org/2020/10/regulation-supervision-and-oversight-of-global-stablecoin-arrangements/
13 https://www.bis.org/cpmi/publ/d198.htm

9
 In its 2021 consultation, the government asked:

1 For views on it’s proposed objectives and principles for cryptoassets

regulation, including whether certain ones should be prioritised and
whether there may be tension between them.

2 Whether respondents agreed with the approach outlined, in which

the regulatory perimeter, objectives and principles are set by
government and HM Treasury, with detailed rules to follow set by the
UK’s independent regulators.

3 For views on the extent to which the UK’s approach should align to
those in other jurisdictions.

4 For views on location and legal entity requirements.

2.16 Feedback from respondents included a wide range of views on how objectives
and principles should be prioritised. A large number of respondents were supportive
of the intention to ensure the UK’s approach is agile and aligns to international
standards. However, some respondents noted a possible tension between the aim to
retain rulemaking ‘agility’ and a preference for regulatory certainty. Respondents also
highlighted the importance of mechanisms for continued industry and expert
engagement in a fast-evolving area which has largely operated without regulation to
date. Some respondents pointed to the experience of UK cryptoasset businesses in
adapting to new anti-money laundering/counter-terrorist financing requirements to
support this.

2.17 Many industry respondents called for innovation and competition to be

prioritised, highlighting the potential opportunities for the UK to attract innovative
firms following the UK’s departure from the EU. However, some stakeholders felt that
this should not be at the expense of robust consumer protection, citing high levels of
fraudulent activity in cryptoasset markets, market integrity concerns and evidence of
consumers experiencing significant losses.

2.18 Respondents overwhelmingly agreed that the regulatory perimeter, objectives

and principles should be set by government and Parliament, with firm-facing rules set
by the UK’s independent regulators. However, many respondents emphasised that
rules implemented by the regulators should be developed in close consultation with
industry. Several respondents highlighted challenges faced by a relatively nascent
industry in adapting to anti-money laundering and counter-terrorist financing
regulation, and highlighted the need for effective implementation and sufficient
capacity and expertise across the UK’s regulators. Respondents also noted the
importance of intelligence, data monitoring and information sharing across the UK
regulators.

2.19 The vast majority of respondents stated that global alignment is particularly
important in a sector which operates on a borderless basis, and highlighted the risk
that firms seek to circumvent requirements in individual jurisdictions without
internationally agreed standards. However, beyond this generally held principle,
differing views emerged as to the stance the UK should adopt. Many stated they
would like to see the UK take a global leadership position with the aim of steering the

10
global regulatory guidance. Others suggested the UK should prioritise developing
harmonised rules through international organisations and standard-setting bodies,
ahead of implementing a UK-specific regime. Others proposed that if a global
framework cannot be achieved, an alternative option could be minimum operating
and conduct standards for currently unregulated cryptoasset activities.

2.20 On the issue of location requirements, there was some support from
respondents for requiring firms to be authorised in the UK in order to actively market
stablecoin to UK consumers. Some noted that it is not appropriate to introduce a
location requirement for overseas issuers or service providers of tokens, but rather that
the marketing and promotion of tokens into the UK which is directed to certain
categories of investors should be regulated where appropriate. Others suggested that
if a firm was issuing a GBP stablecoin they should do so under the authority of the UK
wherever they are based. The reason stated for this is that a lack of location and legal
entity requirements for providers of stablecoin services would unduly increase the
overall threat stablecoin could pose to financial stability, both in the UK and
internationally. Those that supported location and legal entity requirements believed
these should be based on the activity being conducted and the materiality of that
activity.

2.21 There was also, however, broad consensus that location requirements would
be challenging to enforce due to the global nature of stablecoins, and that they could
stifle innovation.

2.22 Several respondents argued that the UK should ensure its overall regulatory
approach is not more onerous than that in other jurisdictions. Those respondents
argued that the government should ensure it adopts an approach that puts it in a
strong competitive position to attract technology-driven investment and new business
to the UK.

2.23 Following consideration of the responses, the government will broadly

maintain the principles and objectives described in the consultation paper and use
these to continue to monitor the framework and regulatory requirements required.
The government’s view is that clear and proportionate regulation is essential to
creating a framework in which the sector can continue to innovate.

2.24 A number of respondents noted concerns relating to the environmental

impact of certain cryptoassets and called on the government to factor these impacts
into its future regime. The government reiterates its firm commitment to positioning
the UK at the forefront of green finance and recognises the issue of rising energy
consumption from certain cryptoassets; the government’s consultation later this year
on regulating a wider set of cryptoasset activities will reflect green commitments and
ensure that the approach is aligned to environmental objectives including the UK’s
net zero target. In this context, the government notes that some stablecoins may be
based on ‘proof of stake’ blockchain systems and may not face energy-consumption
issues which typically relate to the ‘mining’ or proof-of-work process underpinning
certain cryptoassets. The government welcomes the efforts of some cryptoassets to
move to more energy efficient ‘proof of stake’ processes.

2.25 With respect to the design of future regulation, the government will maintain
the proposed approach in which the regulatory perimeter, objectives and principles
are set by government and HM Treasury, with detailed rules set by the UK’s
independent regulators. This approach is consistent with the government’s proposals

11
under the Future Regulatory Framework Review.14 The government judges that this
agile approach will allow the UK to capitalise, to the fullest extent, on the freedoms
gained by the European Union. It will enable UK regulators to adapt to new
developments in the market, including internationally, and adapt rules to ensure they
work for consumers and market participants.

2.26 The government will also continue to work with international partners to
ensure common standards, recognising the borderless nature of cryptoassets activity.
In this, the government welcomes the consultative report of CPMI-IOSCO15, which
confirms that the common international standards for payments systems, the
Principles for Financial Market Infrastructure, apply to any systemic stablecoin
arrangements used for payments, and provides guidance on addressing their novel
features. The government also supports the ongoing monitoring and coordinating
role of the Financial Stability Board (FSB), and its progress report on the
implementation of its recommendations for global stablecoin arrangements.

2.27 In terms of jurisdiction, wallet providers and other entities providing stablecoin
activities for payments in the UK must be authorised by the FCA and would, if deemed
systemic, also be subject to Bank of England supervision.

2.28 With respect to location-based obligations specifically, the government notes

that certain location requirements already exist in UK payments legislation as a
condition of authorisation, notably under the Payment Services Regulations 2017 and
Electronic Money Regulations 2011 –separate from the additional question of what
location requirements may be applied to systemic stablecoins under Bank of England
supervision. Where stablecoins are brought into the existing regulatory perimeter
covered by the FCA’s Regulations, the requirements of the Regulations will apply,
including provisions requiring entities to be based in the UK. This is relevant where
firms may be dual regulated by the FCA and Bank of England in the future.

2.29 The government recognises that making further adjustments to location

requirements in a stablecoin-specific context may interact with the regulatory
treatment of other payments-related activities. Further consideration of the topic
would be beneficial in the context of broader future consultation, such as the
government’s consultation on the systemic perimeter for payments planned later this
year.

Expanding the regulatory perimeter: considerations and

sequencing
2.30 Through the consultation, the government sought views on how best to
sequence proposed regulatory reforms, in order to focus on where opportunities and
risks were most acute. Specifically, the government proposed:

• Focusing the first phase of legislative changes on stablecoins used as

a means of payment. This reflected the propensity of stablecoin to potentially
become a widespread means of payment and store of value;

14 https://www.gov.uk/government/consultations/future-regulatory-framework-frf-review-proposals-for-reform
15 The Committee on Payments and Market Infrastructures and International Organization of Securities
Commissions

12
 • Considering the case for bringing a broader set of cryptoassets (such
as Bitcoin) into a regulatory regime to a longer timetable. In the interim,
applying regulation in relation to consumer communications via the financial
promotions regime, alongside anti-money laundering and counter-terrorist
financing regulation.

2.31 In testing these proposals, the consultation sought to understand if

respondents agreed with the government’s assessment of the benefits and risks,
underpinning the proposed approach. The consultation highlighted the potential
competitive benefits from using stablecoins as a means of payment to challenge
incumbents; the potential to deliver greater speed, efficiency and resilience through
distributed-ledger technology; and to potentially support financial inclusion and
economic growth, including across borders. In addition, the government identified
potential risks from stablecoins used as a means of payment (in the absence of
regulation) to financial stability and market integrity, as well as to consumers and
competition. The government considered that appropriately designed regulation
could promote innovation and industry growth, enabling responsible industry actors
to innovate while ensuring the protection of consumers and the market.

In its 2021 consultation, the government asked:

1. Whether respondents agreed with the government’s assessment of risks

and opportunities.

2. For views on the proposed initial scope of UK cryptoasset regulation.

3. Whether respondents agreed that this approach best balances the

government’s stated objectives and principles.

2.32 There was broad agreement from respondents regarding the government‘s
assessment of opportunities and risks. A large number of respondents focused on
potential risks to consumers and highlighted the importance of awareness and
education. Several consumer groups called for a broader conversation directed at
consumers about the different forms of cryptoassets and the risks they present. A
number of respondents highlighted the role of cryptoassets in potentially facilitating
financial crime and fraud, as well as ongoing concerns about market manipulation
within the industry. Other areas of risk noted by respondents included operational
risk; pricing pressure linked to demand; corporate balance sheet risk; and regulatory
oversight and enforcement risks for a new asset class.

2.33 Respondents also noted a number of specific possible benefits, including

improved financial inclusion and accessibility; reduced transaction costs; faster
payment settlement times; and greater transparency of costs.

2.34 In turn, there was broad agreement among respondents that the ‘backed’
nature of stablecoins makes them similar to traditional financial instruments and that
there is a strong argument for bringing them within the regulatory perimeter. There
was further support for HM Treasury’s technology agnostic approach, where the focus
is on regulating the activity rather than the underlying technology. Respondents also

13
agreed that it was right to focus legislative changes on stablecoins initially, while
noting the need to ensure that there are suitable carve-outs for tokens which may
already fall within existing regulations to avoid firms having to follow two sets of
regulations for the same activities.

2.35 In aggregate, a significant majority of respondents agreed that the proposed

approach balanced the government’s stated objectives and principles, although there
were mixed views on the effect of bringing stablecoin used as a means of payment
into the regulatory perimeter. Some respondents suggested that bringing stablecoins
into the scope of the regulatory perimeter would reduce the risks to financial stability
and market integrity arising from the increasing use of these tokens as a means of
payment and would also go a significant way to enhancing consumer protection.
Respondents stated that limiting the scope to these tokens at this stage should also
help to promote competition and innovation.

2.36 Conversely, some respondents warned that introducing regulation could have
an impact on the usage of stablecoins as a means of payment and may drive
consumers to use unregulated tokens instead, which may give rise to financial stability
and consumer protection concerns. Market abuse regulation was also cited as a
potential gap that could lead to consumer risks and inhibit growth in the wider
‘unbacked’ cryptoasset market.

2.37 In light of the feedback received, the government will continue to focus the
first phase of legislative changes on bringing stablecoins used as a means of payment
into the UK’s regulatory perimeter. The use of stablecoins in retail payments is
emerging, and the government considers that with appropriate protections,
stablecoins could play an important role in facilitating improvements and competition
in payments.

2.38 The market for stablecoins is also growing. The FSB’s progress report on the
implementation of the FSB recommendations states that the total market
capitalisation of stablecoins reportedly stood at around $123 billion in September
2021, as part of the broader growth of the cryptoasset market. The largest existing
stablecoin is Tether, with a reported market capitalisation of approximately $68bn. In
the past year, other stablecoins, such as USD Coin and Binance USD, have also reached
considerable market capitalisations.

2.39 However, the government notes that stablecoins are currently predominantly
used to facilitate trading and investment activities in unbacked cryptoassets, like
Bitcoin, and also play a critical function in emerging decentralised finance
applications. The government is of the view that this will need to be further considered
under a further extension of the regulatory regime to include other activities beyond
stablecoins used as a means of payment.

2.40 Despite prioritising regulation for stablecoins used as a means of payment as

an initial step, the government considers that additional regulation of a broader set
of cryptoasset activities, particularly as a means of investment, should form a second
legislative phase. This is needed to respond to the increasing uptake of wider
cryptoassets; the risks to consumers and markets of their remaining outside the
regulatory perimeter for an extended period; and in order to create a regulatory
environment in which these services can responsibly innovate. A further consultation
will follow later this year.

14
Stablecoin legislation: scope and requirements
2.41 Following consultation and the broad support for the approach proposed, the
government intends to extend the existing payments regulatory regime to cover
issuers of stablecoins and entities providing related services.

2.42 The government intends to do this by amending existing legislation governing

electronic money and payments (and other relevant legislation) at the earliest available
opportunity. The government believes that many stablecoins that reference fiat
currencies share characteristics with existing e-money. Bringing these stablecoins into
the regulatory perimeter for payments therefore critically meets the government’s
stated objective of ‘same risk, same regulatory outcome’. The government also
considers that this approach avoids opportunities for regulatory arbitrage between
traditional e-money and stablecoins and provides greater clarity for firms and
consumers.

2.43 The principal legal instruments that will require amendment are the Electronic
Money Regulations 2011, the Payment Services Regulations 2017 and Parts 5 of the
Banking Act 2009, and the Financial Services (Banking Reform) Act 2013. In turn, this
means that a regulatory mandate in relation to stablecoin will be developed for each
of the Financial Conduct Authority, Bank of England, and Payment Systems Regulator,
as is the case today for traditional payment services and e-money where there is a
need to consider co-responsibility for regulation between the three authorities.

Regulation by the Financial Conduct Authority

2.44 The Electronic Money Regulations 2011 and Payments Services Regulations
2017 provide powers principally to the FCA16 to regulate and supervise firms engaged
in relevant payment activities. The regulations operate on the basis of an
authorisation or registration regime, requiring an application to the FCA in order for
a firm to be permitted to provide services in the UK. The legislation establishes the
prudential requirements (such as capital requirements), in addition to the essential
conduct and operational standards that firms must meet. The FCA has a combination
of rulemaking and enforcement powers as the designated competent authority.

2.45 The government considers that the regulatory framework provides a robust
foundation for payment and e-money firms in the UK. While it may not be applicable
on a strictly like-for-like basis to stablecoins, an adjusted framework could be used as
a vehicle to regulate stablecoin issuance and wallet providers on an appropriate,
consistent and level basis.

2.46 In its consultation, the government proposed that rules and requirements
under the UK stablecoin regime would take relevant aspects of the UK’s current
approach to e-money and payment services regulation, drawing on existing rules as
far as possible. The consultation proposed to:

16 The Payment Systems Regulator also has some limited regulatory areas of competence in relation to payment
systems (and ATMs) under the Payment Services Regulations.

15
 • Establish an FCA authorisation and supervision regime that would capture
stablecoins which could be used as a means of payment. It also outlined
the broad requirements, activities and functions that would be captured as
part of the regime. It proposed that these requirements would be lighter
for smaller firms, mirroring existing arrangements.

• Exclude certain stablecoins (namely algorithmic stablecoins, or those that

may be linked to assets other than fiat currency) from scope, on the
grounds that they share similar characteristics to unbacked cryptoassets
(i.e. they do not reference their value by fiat currency and may not offer
sufficient price stability).

• Allow for exclusions to the authorisation and supervision regime, in line

with current payments and e-money regulation, where a firm may conduct
an activity that falls within scope, but the nature of that activity is
exempted or does not require authorisation.

2.47 The consultation also sought a number of views from correspondents to better
shape and receive feedback on the proposed regulatory regime.

In its 2021 consultation, the government asked:

4. Whether respondents agreed that the activities and functions outlined are
sufficient to capture the activities that should fall within the scope of
regulation.

5. Whether respondents agreed that the government should primarily use

existing payments regulations as the basis of the requirements for a new
stablecoin regime, applying enhanced requirements where appropriate on
the basis of mitigating relevant risks and what other existing legislation
and specific requirements should also be considered.

6. Whether respondents agreed with the high-level requirements outlined

and whether any additional requirements are needed.

7. For views on whether single-fiat tokens should be required to meet the

requirements of e-money under the EMRs, with possible adaptation and
additional requirements where needed.

8. For views on whether exclusions to the authorisation regime are needed

in relation to the stablecoins regime, in light of the government’s
objectives and, if so, which activities should be excluded.

9. For views on the appropriate classification and treatment of tokens that

seek to maintain a stable value through the use of algorithms.

2.48 Most respondents agreed that the UK’s existing payments regulations offer a
good basis for stablecoins, particularly those used in retail payments, where the
Electronic Money Regulations 2011 and Payments Services Regulations 2017 are

16
primarily applicable. Respondents noted that the regulations are well-understood and
have been established over a number of years. However, some responses highlighted
potential risks from seeking to retrofit existing requirements on the basis that it may
be difficult to future-proof them and capture new innovations in the market, or that
they may be inappropriate for tokens used in the wholesale market.

2.49 The majority of respondents agreed that the activities and functions outlined
in the consultation were sufficient to capture the activities that should fall within the
scope of regulation. This included the activities of issuing, creating or destroying
tokens; value stabilisation and reserve management; validation of transactions; access;
transmission of funds; providing custody services for a third party; executing
transactions in stablecoins; and exchanging tokens for fiat currency.

2.50 Most respondents also agreed in principle with the high-level requirements
the consultation expected would apply, including: authorisation requirements with
associated conditions for authorisation; prudential requirements; requirements for the
maintenance and management of a reserve of assets; orderly failure and insolvency
requirements; safeguarding the token; systems, controls, risk management and
governance; notification and reporting; record keeping; conduct requirements;
financial crime requirements; outsourcing requirements; operational resilience, service
reliability and continuity requirements; and security requirements.

2.51 Several respondents asked for further detailed guidance on the functions and
activities in scope (for example, whether decentralised organisations that issue
stablecoins via smart contracts would be within scope). Respondents also sought
detail on the types of requirements that would apply, such as whether the regime
would include strong customer authentication requirements. Some respondents
noted concern about potential overlaps between new requirements and those in
relation to existing regimes, in particular the UK’s AML/CTF registration regime for
cryptoasset businesses.

2.52 In relation to whether tokens referencing a single fiat currency should be

required to meet e-money requirements, responses were broadly supportive. Some
felt that the Electronic Money Regulations 2011 would be a good starting-point but
suggested that amendments may be needed due to definitional issues and potential
additional risks posed, meaning that certain current business propositions may
currently fall out of scope. Others felt that there should be a separate regime to
account for differences in the way stablecoins operate.

2.53 There was general agreement that unbacked tokens that seek to maintain a
stable value through the use of algorithms should be regarded as different to asset-
backed stablecoins. However, views on how to approach them varied – some felt that
they fit in the category of unregulated exchange tokens (and as such should not be
subject to comprehensive regulation), while others thought doing so may offer an
arbitrage opportunity and so they should be subject to a regulatory regime to address
potential consumer harm or financial stability risks. It was also suggested that such
tokens may become more stable with scale.

2.54 On the topic of whether exclusions to the authorisation regime are needed,
several respondents noted the existing exemptions in the Electronic Money
Regulations 2011 and Payment Services Regulations 2017 would be broadly
applicable. Other activities that respondents suggested should be out of scope
included non-custodial wallets (which give control of the wallet to individuals and not

17
a third party), and validation of transactions and access, where these functions are
delivered by technology firms that are not involved in buying/selling tokens.

Changes to the FCA’s e-money and payment services

regimes
2.55 After carefully considering responses to the consultation and via ongoing
consultation with the UK’s regulators, the government’s proposed regulatory
approach will entail changes to the e-money and payment services regimes to provide
the FCA with appropriate powers over stablecoin issuers and other entities, including
wallet providers. The approach will ensure convertibility into fiat currency, at par and
on demand. FCA guidance and rules will set out in detail the requirements that apply
to specific activities.

2.56 The existing payments framework would need to be adjusted to cater for this
model and the government therefore intends to make appropriate amendments to
certain aspects of the regulations, for example the definition of e-money.

2.57 Overall, the government is minded to develop a definition for ‘payment

cryptoasset’ (or something similar) that brings into scope any cryptographically
secured digital representation of monetary value which is, among other things
stabilised by reference to one or more fiat currencies and/or is issued and used as a
means of making payment transactions.

2.58 It is proposed that a definition along these lines would capture all stablecoins
that reference fiat currencies, including a single currency stablecoin or stablecoin
based on a basket of currencies.17

2.59 This would, intentionally exclude a number of existing stablecoin models,

including stablecoins which stabilise their value by referencing other assets such as
commodities. Having further considered feedback, and following detailed
engagement with the FCA, the government considers that in practice those tokens
are unlikely to meet the minimum requirements that are expected from a token used
in retail payments. Further, as noted in feedback, depending on the particular
structure of the arrangements, many tokens which stabilise their value by referencing
other assets, like commodities, may already fall within the regulatory perimeter (e.g.
as specified investments). Though this is subject to a case-by-case assessment.

2.60 Stablecoins and their underlying technical and contractual arrangements can
vary significantly. Notably, in some arrangements, the stablecoin issuer may not offer
holders a legal claim on the issuer. This means that the right of a customer to redeem
the value of the token (or against a reserve of assets) may sit with a third party, or
may not exist at all. In contrast, offering a claim against the issuer is firmly established
within the definition of traditional e-money: “stored monetary value as represented
by a claim on the issuer which is issued on receipt of funds for the purpose of making
payment transactions…”.

17 The legislation would also capture instruments achieving the same effect, e.g. a stablecoin referencing another
stablecoin linked to fiat money, or an instrument which derives its value predominantly from reference to fiat
currency.

18
2.61 Within the new regulatory regime proposed for stablecoins, the government
consider that it would be unacceptable for there to be no legal claim at all for the
customer, as this would fail to deliver the level of consumer protection necessary and
would not provide equivalence between traditional e-money and stablecoin used as
a means of payment. However, given the particular characteristics of stablecoins and
that the customer relationship may be with a third-party intermediary (such as a
wallet), the government considers that customers should generally be able to make a
claim to either the stablecoin issuer or, where appropriate, the consumer facing entity.
The legal requirement would continue to sit with the issuer but requiring the issuer
to fulfil directly the legal claim requirement is a high bar, which may only be necessary
in systemic cases. In cases of systemic risk, and where judged necessary, the Bank of
England may seek to require a direct legal claim on the issuer to address financial
stability risks. The statutory redemption rights set out in the Electronic Money
Regulations 2011 would also apply.

2.62 The government also intends that safeguarding requirements, which exist
today under the Electronic Money Regulations 2011, will apply to customer funds
received in exchange for issuing a stablecoin. Safeguarding rules are designed to
protect customer funds if an institution becomes insolvent and includes, for example,
the requirements that funds are either held in a separate account from the institution’s
working capital, invested in high quality liquid assets, or are covered by an appropriate
insurance policy or comparable guarantee. It means in practice that each £1 token
issued will need to be safeguarded with £1GBP, and those funds cannot be used for
any purpose (e.g. lending). Further detail on how this will be enacted in a stablecoin-
specific context would be set out by the FCA.

2.63 More widely, the broad apparatus and key features of the Electronic Money
Regulations 2011 would apply to stablecoin issuance, ensuring consistency with
traditional e-money regulation.

2.64 With respect to exemptions from the regulatory regime, the government
proposes to impose broadly the same set of exemptions which exist within the
Electronic Money Regulations 2011 to stablecoins. This includes, for example, the
limited network exclusion.

2.65 Finally, the Electronic Money Regulations 2011 and Payment Services
Regulations 2017 also establish their own, tailored requirements in relation to
consumer protection.

Introduction of a new regulated custodial activity

2.66 The role of the wallet provider is a key feature of cryptoassets, unlike
traditional e-money. Customer interaction with a stablecoin (i.e. onboarding the
customer and providing access to the token) often takes place through the third-party
wallet provider (or an exchange), which hold the stablecoin or the means of access to
the stablecoin (i.e. the ‘private key’) on behalf of consumers using their services. This
allows for stablecoins to be exchanged without redemption of the underlying funds
via the issuer. The issuer instead holds the assets or funds backing the stablecoin,
whereas the wallet provider or exchange provides access to the token.

2.67 The government considers that regulation is therefore required to ensure the
custody or arranging the custody of the token is subject to appropriate regulation.

19
The intention would be to cover the act of someone other than the issuer holding the
stablecoin used as a means of payment (or means of access to the stablecoin) on
behalf of a third party. It would be intended to capture wallet providers or any firms
(e.g. exchanges) offering similar services. It would therefore bring within the UK
regulatory perimeter firms that provide services to custody or arrange the custody of
stablecoins used as a means of payment on behalf of customers.

2.68 The government will set out in legislation how that new activity will be
brought within the regulatory perimeter, and the FCA’s powers. Bringing custody into
the regulatory perimeter will bring this activity into the UK’s jurisdiction, requiring
authorisation by the FCA. The government and regulators will provide further detail
on exclusions to this regime in due course.

2.69 The FCA will establish the detailed set of regulatory rules applicable to
stablecoin custodians, covering for example:
• Prudential and organisational requirements;
• Reporting requirements;
• Conduct of business requirements;
• Operational resilience
• Custody/safeguarding requirements;
• Consumer protections.

2.70 Where a firm providing custody (or arranging custody) also meets the
requirements of the Banking Act and is therefore recognised as systemic, the firm
would be dual regulated by the FCA and Bank of England.

Regulation by the Bank of England and the Payment

Systems Regulator
2.71 Today, the Bank of England regulates and supervises systemic payment
systems and service providers for those systems, following the making of a recognition
Order by HM Treasury under Part 5 of the Banking Act 2009 that identifies a particular
payment system as systemic. Criteria for recognition as a systemic payment system
includes: potential disruption to the UK financial system; with factors including likely
volume and value of transactions; the nature of transactions and links to other
systems, as well as substitutability; and use by the Bank of England in its role as
monetary authority. The Bank of England has powers to publish and enforce codes of
practice for operators of payment systems and service providers, set system rules, and
issue directions.

2.72 At consultation, HM Treasury sought views on proposals to give the Bank of

England responsibility for systemic stablecoin payment systems and service providers,
noting the concerns of the Financial Policy Committee (FPC) about potential systemic
risk. The government proposed continuing to apply a high bar for the recognition of
a particular payment system as systemic, as is achieved by the recognition-based
process under HM Treasury.

2.73 A similar question on expanding regulatory responsibility was asked in relation

to the Payment Systems Regulator which, like the Bank of England, is responsible
today for overseeing payment systems, with an ancillary role for participants in those
systems.

20
 In its 2021 consultation, the government asked:

1. Whether respondents agreed that Part 5 of the Banking Act should apply
to systems that facilitate the transfer of new types of stablecoins.

2. For views on potentially extending Bank of England regulation of wider

service providers in the stablecoin chain, where systemic.

3. Whether respondents agreed that Part 5 of FSBRA 2013 should apply to

payment systems facilitating the transfer of new types of stablecoins.

2.74 There was general support for the extension of Part 5 of the Banking Act 2009
to systemic stablecoin payment systems where that system meets the amended
definition of a ‘payment system’. Several respondents highlighted, however, that most
stablecoin arrangements are unlikely to reach the threshold of becoming systemically
important to the UK, particularly in the near-term. Some respondents recommended
ongoing monitoring until a payment system becomes systemic.

2.75 In turn, the majority of respondents also agreed that Part 5 of the Financial
Services (Banking Reform) Act 2013 should apply to payment systems facilitating the
transfer of new types of stablecoin. Though several respondents noted that enhanced
regulation would need to be balanced against possible impacts on competition and
UK competitiveness.

2.76 There was also general agreement that the Bank of England should extend its
regulation to service providers where they are deemed systemic or where they provide
services in connection with systemic stablecoin payment systems. However, one
respondent suggested that effective regulation would require an internationally
coordinated approach to supervision, involving other international regulatory bodies,
given that arrangements are intended to operate on a cross-border basis.

2.77 Further to the consultation and ongoing dialogue with the independent
regulators, the government considers that it is necessary to extend the scope of the
Banking Act 2009 to capture relevant stablecoin-based payments systems. The
government anticipates broadening the definition of a payment system to include
arrangements that facilitate or control the transfer of ‘digital settlement assets’ (or
something to that effect), which would be designed to capture stablecoin-based
arrangements. Such a digital settlement asset would be drawn broadly, in order to
ensure required regulatory flexibility. In line with the Bank of England’s existing
powers, where appropriate this would enable supervision of a recognised entity at
launch.

2.78 The Bank of England’s Digital Money Discussion Paper18 considered the types
of stablecoin regulatory models that may be suitable to mitigate risks posed by
systemic stablecoins. This included a bank model, in which the stablecoin would be
regulated within the existing banking regime, as well as models where the stablecoins

18 https://www.bankofengland.co.uk/paper/2021/new-forms-of-digital-money

21
would be backed by central bank liabilities, deposits at commercial banks, or in high
quality liquid assets respectively. The powers under the Banking Act are intended to
facilitate regulation in line with any of these models if deemed appropriate for stability
purposes. The Bank has published responses to its discussion paper and will consult
on a final approach to backing models in due course.

2.79 In turn, the government also intends to extend the scope of the Financial
Services (Banking Reform) Act, to capture relevant stablecoin-based systems within
the purview of the Payment Systems Regulator. Clarification will be provided so that
the legislation operates appropriately for ‘digital settlement assets’.

2.80 Furthermore, the government proposes widening the application of the

Banking Act to include a defined set of service providers to which regulation could
apply, in particular wallets, but also other entities such as exchanges, or to custodians
of stablecoin reserves. These extensions will apply where use is made of ‘digital
settlement assets’ and will be framed so as to provide flexibility to account for future
developments in stablecoin.

2.81 A similar approach would be adopted in the Financial Services (Banking

Reform) Act 2013 to clarify the reach of the Payment Systems Regulator over a defined
set of entities to which the regulation will apply, in particular wallets, but also other
entities such as exchanges or stablecoin reserves.

2.82 Finally, the government considers that arrangements will be needed to

manage risks related to systemic stablecoin failure. This was not included in the
government’s consultation; however, the Bank of England’s subsequent discussion
paper, published in June 202119, highlighted the importance of appropriate backstop
arrangements for these firms to meet the Financial Policy Committee’s expectations
and ensure sufficient public confidence.

2.83 Further work will be required to understand if there is a need for a bespoke
legal framework for the failure of systemic stablecoin firms and, if so, its design. In
the interim, it is important to ensure existing special administration regimes can be
effectively applied to stablecoin firms. At present, however, there is arguably a lack of
clarity over which special administration regime (SAR) would apply were a systemic
stablecoin firm to fail. Furthermore, the fluid and developing nature of stablecoin
business models and their use means there is an ongoing risk that models evolve
beyond the bounds of the existing frameworks. Amendments are therefore needed to
clarify which regime applies and ensure that there are no regulatory gaps in terms of
consumer protection and financial stability.

2.84 HM Treasury therefore intends to make appropriate amendments to the

Financial Market Infrastructure SAR, and clarify that it, rather than the Payments and
E-Money SAR, should (with alterations) apply to systemic stablecoin arrangements. A
consultation on the initial amendments deemed necessary will be launched later this
year.

Co-responsibility for regulation

2.85 A feature of the current design of UK payments and e-money legislation is a
degree of regulatory overlap between the authorities, where responsibilities are
distributed across the regulators and they set requirements and oversee firms

22
pursuant to their differing statutory objectives. Both the Bank of England and Payment
Systems Regulator have responsibilities in relation to payment systems but with very
different mandates (financial stability and effective competition respectively). The
Payment Systems Regulator also has certain responsibilities in relation to participants
in payment systems (such as banks or other forms of payment service providers).
However, the FCA is the authority primarily responsible for regulating payment
services provision.20

2.86 Under the government’s proposal to extend the existing payments and e-
money regulatory frameworks to certain stablecoins, further regulatory overlaps will
apply. In particular, regulatory overlaps will arise between the Bank of England and
FCA. In this scenario, the government expects that the Bank of England will be the
lead prudential regulator for systemic stablecoin entities that are also FCA authorised.

2.87 Several respondents sought clarity on how the regime would treat operators
or providers that transition from FCA authorisation requirements to Bank of England
systemic regulation and called for effective coordination across the UK’s regulatory
authorities. Some concerns were raised about the potential for differing requirements,
particularly if a stablecoin becomes systemic over time.

2.88 These sorts of regulatory overlaps are managed today through a number of
legislative provisions that require the regulatory authorities (and HM Treasury) to
consult the relevant parties where appropriate so as to ensure regulatory coherence.
While these provisions are effective, the government considers that providing
additional clarity as to the application of regulation where there is overlapping
regulation would be beneficial.

2.89 To ensure sufficient transparency and a holistic regulatory approach, the

government intends to put in place a regime that allows for the clear identification of
the applicable regulatory requirements (e.g. in relation to prudential rules) where a
payment system is recognised as systemic. In addition, the Bank of England, FCA and
Payment Systems Regulator will be required to set out in a clearly accessible and
publicly available means their approach to co-regulation.

20
The FCA’s mandate for regulating payment services is broad, covering conduct, market integrity, and
non-bank prudential regulation, as well as areas of competition. The Payment Systems Regulator’s
(PSR) mandate for regulating participants in payment systems is primarily to promote effective
competition, innovation, and ensure that user needs are met. The PSR’s current general strategy can be
found here: https://www.psr.org.uk/publications/general/the-psr-strategy/

23
Call for Evidence on investment and wholesale uses

3.1 In addition to exploring a regulatory framework for stablecoins, the

government’s consultation sought stakeholder views on a broader range of questions
in relation to cryptoassets used for investment purposes, and the use of DLT in
financial markets. In particular, it asked about the benefits and drawbacks of adopting
DLT across financial market infrastructures; whether there are obstacles to its
adoption; and what further actions government and regulators should consider in this
space.

Security tokens
3.2 The use of tokens to facilitate securities transactions is an important
development for the financial sector. The representation of traditional securities, such
as equities or debt, on a distributed ledger (the ‘tokenisation’ of assets) could have
substantial implications for the way assets are traded or capital is raised. Security
tokens that exist and are traded exclusively on the distributed ledger (and are therefore
‘digitally native’) are also playing an increasing role across markets.21

3.3 As part of the FCA’s Regulatory Sandbox programme, firms have also
compliantly issued equities, bonds and structured products on the Ethereum
blockchain. These small-scale tests showed the potential of DLT-based systems to
deliver securities issuances more efficiently; faster and cheaper when compared to
traditional issuances, while increasing the transparency of ownership. However, the
government recognises that existing regimes were not originally intended to support
the use of cryptoassets or DLT-based innovations. The call for evidence therefore asked
for views on areas of existing regulation where clarification or amendments are
needed to support the use of security tokens.

3.4 Respondents noted that existing legislation and definitions provide a good
starting point for enabling tokenisation, but stressed the need to provide regulatory
certainty by providing guidance and/or amending existing rules early where clear
regulatory obstacles to digitisation have been identified. Clarifications to ensure,
where possible, that security tokens fall within existing regulations (in particular within
the Regulated Activities Order and UK Markets in Financial Infrastructure Directive)
were endorsed by many responses. Responses also noted various areas of legislation
that would potentially benefit from further clarification and/or amendment.
Respondents in particular highlighted areas of existing financial market infrastructure
legislation, such as the UK Central Securities Depositories and Settlement Finality
Regulations – the responses to these areas are covered in more detail below.

3.5 HM Treasury will work closely with the Bank, FCA and industry to consider
what possible changes may be necessary, and the means (i.e. guidance or the need
for legislation). Given DLT is at an early stage of adoption, further issues with the
existing legislative framework may be identified as DLT is used more widely, meaning

21
See for example https://www.societegenerale.com/en/news/press-release/luxse-admits-security-
tokens-issued-societe-generale and https://axoni.com/press/blackrock-goes-live-on-axoni-equity-swaps-
network/

24
it is important that a flexible approach is taken to ensure that legislation is able to
evolve over time in response to market developments.

DLT-based financial market infrastructure

3.6 DLT is a type of technology that enables the sharing and updating of records
in a decentralised way. While there is no standard definition of DLT, DLT systems are
characterised by various features, including use of cryptography, distribution of data
across multiple participants, the programmability/automation of functions, and (in
some cases) decentralisation of control.

3.7 The call for evidence discussed the potential benefits of DLT systems for
financial market infrastructure. FMIs such as central securities depositories (CSDs) and
central counterparties (CCPs), together with trading venues and other intermediaries,
underpin financial market activity in the UK and worldwide. These entities process
financial market transactions for a network of otherwise unconnected businesses and
individuals. They assist in minimising the costs involved in making payments, settling
transactions in financial instruments, or managing overall risk in these transactions.
The application of DLT to these processes could have significant consequences for the
UK’s financial market. Because of this, the government sought feedback from industry
to understand its potential impact on FMIs and financial markets, and to help clarify
what policy interventions may be needed now and in the future. The following
sections of this document summarise the responses received from the call for evidence
on those questions related to DLT based FMI.

The potential benefits of adopting DLT in wholesale

markets and FMIs
3.8 Responses noted that, while it is in its infancy in terms of adoption across
financial markets, DLT could substantially improve how FMIs operate. However, the
realisation of these benefits, as well as potential drawbacks, will likely depend on the
type of DLT systems employed and on how implementation is managed. Some of the
key potential benefits identified in the Call for Evidence included:
• Delivering greater operational efficiency. Most responses highlighted that
DLT could streamline and automate existing processes, delivering faster
settlement times, more efficient reconciliation arrangements and quicker
processing of corporate actions (such as coupon or dividend payments).
Many responses emphasised that this could lead to changes in market
practices, such as the shortening of settlement cycles, support same day
settlement and the reduction of settlement failures (some respondents noted
that existing technology could also achieve some of these benefits). Many
responses suggested that the use of a single ledger could reduce the
fragmentation of processes across different entities (though some responses
highlighted the possibility of increased fragmentation, see below). All these
outcomes, if realised, could deliver savings both for FMIs and end-users.

• Reducing risk. Most respondents suggested that DLT could be used to

enable transactions to be settled immediately and with complete certainty
(given a record is immutable and cannot be changed). This could reduce

25
 different types of risk (such as the risk of a counterparty failing to fulfil its
side of a transaction), with the potential to reduce the amount of capital
necessary to hold against such exposures.

• Improved transparency and traceability of transactions. Respondents felt that

DLT systems could better enable information to be synchronised and shared
between participants. This could increase the visibility of financial market
activity for both market participants and regulators, who could see market
data in real-time. DLT financial market infrastructures could reduce the
fragmentation of data across the market ecosystem (given that currently
information tends to be held by different intermediaries running separate
unsynchronised databases, while on a distributed ledger all information
would be available and synchronised immediately on an ongoing basis).
Again, some respondents stressed that reducing fragmentation will depend
on whether DLT systems are able to interoperate both with each other and
with legacy non-DLT systems. Respondents felt that DLT could potentially
help enable more direct relationships between market participants (allowing
issuers to have more direct relationships with their investors), enable end-
investors to be more easily identified, and more easily facilitate know-your-
customer and anti-money laundering checks.

• Increased resilience in FMI services. DLT-based networks are potentially more

able to withstand outages, with its distributed/decentralised nature ensuring
that there is no single point of failure, meaning a DLT system could continue
to operate despite outages with individual participants.

3.9 Many respondents suggested DLT could be adopted in different ways by FMIs.
It could enable existing FMIs to provide a more effective service, or it could lead to the
appearance of new FMIs using DLT to perform infrastructure services more efficiently.
Some respondents suggested that the presence of new FMIs using DLT could create
more competition in the provision of FMI services, giving users greater choice.
Ultimately, DLT could facilitate disintermediation, by enabling services currently
performed by multiple different types of FMI to be carried out on a single distributed
ledger, thereby creating new, more integrated forms of FMI. Fewer entities sitting
between buyer and seller could potentially mean that trading and post-trade services
as a whole could be made more streamlined; conversely, this could introduce risks
without the protections facilitated by intermediaries.

3.10 In the long term, depending on how DLT is implemented, these developments
could therefore amount to a fundamental reorganisation of financial markets, with
new types of intermediary and potentially altered relationships between market actors
(particularly investors and companies).

The potential drawbacks of adopting DLT in wholesale

markets and FMIs
3.11 The Call for Evidence also asked about potential drawbacks of adopting DLT
across wholesale markets and in FMIs. Some key drawbacks highlighted in the
responses were:

26
 • Disruption to existing market practices. Respondents noted that the
adoption of DLT could disrupt financial markets, and not always positively.
For instance, DLT systems could change trading and settlement lifecycles in a
way that potentially increased liquidity requirements (given that users would
need to have pre-funded cash and securities available for each settlement,
with instantaneous settlement of transactions undermining netting, which
offsets and reduces liquidity needs). Some respondents flagged that
changing market cycles due to the implementation of DLT could mean the
loss of intervals in the market that currently function as a safety measure (for
example, if DLT networks were to operate on a 24/7 basis, this could remove
the current breaks in trading used for performing maintenance). Continuous
trading could also mean markets would not have time to disseminate and
adjust to new information, potentially creating a financial stability risk due to
disequilibrated pricing.

• Greater fragmentation: Many respondents noted that the appearance of

new forms of FMI could fragment liquidity pools, particularly if
interoperability is not developed, given that post trade activities are currently
consolidated and concentrated in few FMIs. Although a DLT system may
provide new efficiencies, participants having to join multiple different DLT-
based FMIs could face additional costs and burdens. There is a risk that
different types or classes of security could be traded on separate venues that
are not interoperable, meaning greater fragmentation for users. Inconsistent
adoption of DLT across jurisdictions internationally could create
fragmentation in global markets.

• Difficulties in implementation. Respondents noted the difficulty in evolving

out of legacy structures and processes, especially given the significant
potential changes to existing business models. DLT-based systems may need
to be interoperable with legacy systems, at least in the short- to medium-
term, as well as each other, to facilitate any transition. The initial investment
required to set up a DLT FMI may be significant, particularly when DLT has
yet to be tested at scale (and current market structures work relatively well).

3.12 Respondents emphasised that the extent of any disadvantages may also
depend on the type of DLT-based system adopted and could in many cases be
mitigated by maintaining aspects of existing systems. For instance, current FMIs are
particularly reliant on the need for a central operator responsible for managing the
internal functioning of the system, and for ensuring that the system meets its
regulatory requirements. A DLT FMI that lacks the functions of central operator may
struggle to fulfil these functions, whereas a DLT FMI that does enable some form of
central administration may be in the position to do so more effectively.

3.13 Current FMIs also need to ensure that they have suitable and robust
participants, while a DLT FMI operating a ‘permissionless’ system (in other words an
open network that can be accessed by anyone) may be unable to do this. These issues
may mean that certain forms of DLT FMI may not have sufficient governance and
systems and controls in order to operate in mainstream financial markets or become
acceptable from a regulatory standpoint. Conversely, a ‘permissioned’ system may be
better able to deal with these issues, given their ability to manage who can participate
on their system.

27
3.14 Respondents noted that some of the changes often associated with DLT
systems are not necessarily enabled by DLT alone, though DLT could be an effective
way to facilitate such changes. For example, DLT may help deliver 24/7 operation for
financial markets, though it is not intrinsically necessary that DLT FMIs would operate
on a 24/7 basis (they could potentially use different operating hours if that was the
preference of its users), and existing technologies may also be capable of enabling
24/7 operation.

Shortcomings of the current legislative/regulatory

framework
3.15 The Call for Evidence asked whether UK regulation or legislation supports the
adoption of DLT in wholesale markets and FMIs, as well as how regulation and
legislation might be optimised for DLT. Respondents cited obstacles to the adoption
of DLT in wholesale markets and FMIs in UK law, which require review, and then
clarification and/or amendment. It was widely noted by respondents that the current
legal and regulatory framework largely pre-dates technologies like DLT. As a result,
concepts and terms used in UK legislation and regulation reflect the roles and
functions of traditional financial infrastructures and intermediaries and the operation
of existing legacy IT systems, and may need to be updated to accommodate new
technologies like DLT. Any changes should seek to ensure that legislation remains
technology neutral and able to adapt to DLT.

3.16 A central point highlighted by responses was the need for an assessment of
the current roles and responsibilities of FMIs. In particular, responses focused on the
role of central securities depositories (CSDs), the institutions that hold securities and
perform settlement, issuance and maintenance functions, as well as other FMIs. The
adoption of DLT may require changes to the UK Central Securities Depositories
Regulation (CSDR, Regulation (EU) No 909/2014), the retained EU legislation that sets
requirements for the authorisation and supervision of UK CSDs and certain settlement
aspects of securities transactions. Respondents particularly questioned the existing
requirement in the CSDR that requires trading venues to use a CSD to record/settle
securities traded on its platforms, noting that changes to this requirement may be
needed to realise the full benefits of DLT (by enabling trading venues to use DLT to
record and settle transactions traded on their market). It is also unclear whether the
definitions in the CSDR would accommodate how DLT-based systems function, in
particular the definition of ‘book-entry’ requirements or a ‘securities account’. Further
legislative provisions may need to be revisited, such as those around cash settlement
and outsourcing.

3.17 Responses raised fundamental legal questions around the ownership of

securities tokenised using DLT, and how they fit within existing legislation. In
particular, the Uncertificated Securities Regulations (USRs), which enable units of a
security to be evidenced and transferred electronically, were highlighted, given the
USRs need to be applied to DLT systems to enable them to evidence transfer of title
for each transaction in DLT securities. Respondents stressed that the USRs were not
made with DLT in mind and may need to be revised to ensure they are fit for
accommodating DLT. Clarity may need to be provided around what constitutes
settlement for DLT-based securities (and at what precise point a settlement is said to
have occurred in a DLT-based system), to ensure that legal certainty is preserved for

28
the settlement of transactions. New requirements may also be needed to address
new challenges and risks arising from DLT such as smart contracts and cyber security
risks. There are also potential conflicts of law issues should a DLT network have nodes
in multiple jurisdictions.

3.18 Some respondents identified other areas of legislation that may contain
barriers to use of DLT in markets. Definitions and provisions in UK MiFID were
identified as in need of clarification/amendment, as well as those in the UK Settlement
Finality Regulations and Financial Collateral Regulations. Respondents also highlighted
potential changes to provisions in other relevant legislation such prospectus rules, the
Companies Act, the UK EMIR, GDPR, MAR, AIFMD, UCITS, EBR, OEIC Regulations, the
FCA CASS rules and the FCA COLL handbook.

3.19 Given the relatively limited amount of experience firms have with using DLT
for FMI services, it may still be difficult for firms to identify all provisions in legislation
that could act as a barrier to the use of DLT FMIs in future. Further obstacles in
legislation may become more apparent as use of DLT becomes more widespread,
meaning a degree of legislative and regulatory flexibility may be required.

Views on the adoption of DLT in wholesale markets,

market coordination and common standards
3.20 The Call for Evidence also sought views regarding industry incentives or
obstacles to adopting DLT in wholesale markets; on whether there is a need for market
coordination; and on the adoption of common standards. Responses noted that the
potential benefits (outlined above) provided a strong rationale to allow for the
adoption of DLT, while noting the challenges to adopting DLT around an uncertain
regulatory framework, the investment/resourcing costs and lengthy timeline for
implementation. The small scale of current experiments may mean that there may not
always be full consideration of how DLT FMIs could or should interact with other post
trade products and services, and what the impact on markets as a whole will be.

3.21 Responses noted that market coordination could entail a variety of initiatives,
with the use of sandboxes, expert working groups, and developing standards
(particularly those facilitate interoperability and appropriate governance) all endorsed
by respondents. Respondents highlighted national and supranational bodies that are
engaged on the issues relating to DLT-adoption, such as the FSB, the BIS Innovation
Hub and Global Financial Innovation Network (GFIN). Responses noted that
coordination at international level, particularly through participation in both regulator
and industry forums, would ensure better outcomes for cross border activity, such as
by collectively developing best practices and setting international standards.

Role of government and regulators in facilitating DLT in

financial markets
3.22 The Call for Evidence asked about what the UK government and regulators
should be doing to help facilitate the adoption of DLT/new technology across financial
markets and FMIs. Most responses suggested that optimising the UK's legal and
regulatory framework as the key priority for government and regulators. Respondents
encouraged the government to work with market participants when modifying the

29
UK’s regulatory framework to ensure that it responds to the needs of the financial
services industry.

3.23 Respondents noted that there is a need to test solutions, in order to learn from
practical experience how DLT will be adopted in FMIs. This should entail enabling firms
to request exemptions/modifications to requirements that are obstacles to using DLT
in UK legislation. Regulatory sandboxes were regularly cited as an effective way of
trialling and nurturing new technologies. The FCA Sandbox was emphasised as a
positive tool for UK policymakers, given it enables a balanced understanding of the
benefits and the risks to be gained, with insights then used to inform policy making
and supervisory practice (with the caveat that the FCA Sandbox tests solutions within
the existing rules, and does not allow changes to legislation). Several responses also
cited similar approaches taken in other jurisdictions, in particular the EU pilot regime,
as providing benefits here. Respondents were supportive of some form of sandbox or
pilot regime as a stepping-stone towards the development of permanent market
changes.

3.24 Respondents highlighted several further ways the government could

incentivise industry to explore DLT based systems, including through tax incentives
and grants.

Government response to the Call for Evidence on DLT in

FMIs
3.25 The government recognises that using DLT to provide the FMI services that
underpin financial markets could unlock substantial benefits, enabling present-day
processes to become more efficient, transparent, less costly, and more resilient. There
are also potential risks that need to be managed, particularly in the disruption to
existing market practices and the potential fragmentation in the provision of FMI
services (both between DLT and legacy systems and between DLT systems themselves).
DLT could radically change the way wholesale markets operate, with existing
intermediaries and business models replaced by DLT-based entities, though it is likely
that DLT and non-DLT systems will operate side-by-side for at least the medium term.

3.26 After considering the responses to the Call for Evidence, the government
recognises that existing financial services regulation and legislation were drafted
without DLT in mind, meaning current legislative provisions may contain obstacles or
ambiguities which hinder the adoption of DLT, or mean it is difficult to realise the
potential benefits fully. The government intends to support industry in ensuring that
legislation and regulation can accommodate tokenisation and DLT in FMIs.

3.27 While legislative changes are likely to be required, it is not yet fully clear how
and where these changes should be made. Responses to the call for evidence
therefore called for a sandbox-style regime whereby participants could request
exemptions from or modifications to existing legislation, in order to facilitate testing
of DLT in FMIs and enable the UK authorities to gain a better understanding around
the legislative changes necessary to accommodate DLT.

3.28 Following consideration of the views shared in the call for evidence and
industry feedback, in April 2021, the Chancellor announced that HM Treasury would
partner with the FCA and Bank of England to develop a Financial Market Infrastructure
(FMI) Sandbox. This would support firms wanting to test new technologies or

30
structures, in particular (but not necessarily limited to) DLT, to provide the
infrastructure services that underpin markets (such as trading and settlement). We
anticipate that the sandbox will do this by creating a regulatory framework that is
temporarily modified for participating entities, where existing rules, regulation and
legislation currently act as a barrier to adoption. Participants would still have to meet
the high regulatory standards expected of existing FMIs, and regulatory outcomes, in
particular those relating to financial stability and cyber security, should continue to be
safeguarded. This will give industry the opportunity to use DLT to provide FMI services
(and be able to test in the market), but in a controlled manner and with appropriate
regulatory oversight. It should enable HM Treasury and the regulators to understand
if and how FMI legislation needs to be amended permanently to accommodate DLT.

3.29 The FMI Sandbox will be up and running in 2023. Multiple iterations of the
Sandbox, whereby testing can take place for different market functions and activities,
may ultimately be taken forward. In terms of the technology being tested, the
government intends to ensure that the scope of the Sandbox can go potentially wider
than DLT, to allow innovation with other solutions which may not strictly be DLT-
based, but where other similar benefits could be delivered. This will safeguard the
principle of technological neutrality emphasised by many responses to the Call for
Evidence.

3.30 HM Treasury intends to legislate for powers that will enable it to set up the
FMI Sandbox (and potentially multiple iterations of the Sandbox) when Parliamentary
time allows. We expect further consultation with industry in advance of HM Treasury
introducing secondary legislation to set out the detailed legislative framework of the
Sandbox.

3.31 In designing the Sandbox, HM Treasury, working with regulators and industry,
will need to address the following issues:
• The relevant legislation that may be modified or disapplied for Sandbox
participants, in cases where it does not support new technologies such as
DLT and where there is a clear case for doing so. Currently, we envision
including provisions covered by retained EU law and legislation transposing
EU law (CSDR, MiFIR, SFD, FCARs) and existing UK law (USRs, FSMA, FSMA
Recognition Requirements, FSMA Regulated Activities Order, UK company
law).

• The types of entity that will have access to the Sandbox. For example, the
sandbox could support certain types of trading venue, such as Multilateral
Trading Facilities (MTFs), who want to provide CSD-type functions (such as
issuance, settlement, and securities maintenance) in addition to trading.

• The requirements that Sandbox participants will need to meet in order to

maintain the high standards expected of existing FMIs. For example, were
the Sandbox to include trading venues performing securities settlement
functions, this trading venue will be subject to an appropriate set of
regulatory requirements (such as the relevant rules from UK CSDR), adapted
to enable the use of DLT for settlement, while maintaining high regulatory
standards overall. We would also expect Sandbox participants to have clear
business plans setting out how they intend to ‘scale up’ (and exit the
Sandbox) in a safe manner, as well as the ability to wind down their
operations without causing wider disruption to the market.

31
 • The nature and scale of activities permissible within the Sandbox, to reflect
that it is designed to safely test new innovative arrangements, structures and
new requirements in the market. Given the experimental nature of the
Sandbox, these are necessary in order to avoid entities in the Sandbox
operating at a level that poses risks to financial stability. This may include
setting restrictions on the types of securities that are in scope, limits on the
volumes of transactions that Sandbox entities can trade/settle, and
limits/thresholds on the value of securities that can be issued in the Sandbox.
We will need to consider whether or not participating firms could offer their
services to wholesale markets only or potentially to retail investors as well.

• The roles and responsibilities of the regulators with regards to the running of
the sandbox and providing oversight of participants.

3.32 Lessons learned from the Sandbox could support permanent rule changes,
and we will seek to ensure that HM Treasury and the regulators have the ability to
make changes to legislation quickly in response to feedback from the Sandbox, again
in consultation with industry.

3.33 The government will continue to assess, on the basis of industry feedback,
where changes could be made permanently to legislation, provided such changes do
not undermine existing regulatory outcomes. Certain new features of DLT which are
not covered by existing legislation may need new requirements, such as smart
contracts, private wallets, and private keys, which the government will consider how
to take forward. How to handle and address new issues and risks arising from how
DLT functions (such as the functioning of smart contracts and cyber security) would
need to be considered. The government is aware that DLT is one of many technologies
touted to deliver significant improvements in financial markets and will seek to ensure
that technological neutrality remains at the core of its approach to changing
legislation. It will consider these issues within the wider context of the proposed
Future Regulatory Framework, as well as via the FMI Sandbox.

3.34 The government will continue to work together with industry and regulators
to assess the impact of DLT adoption on markets as a whole. This may particularly
focus on the scenario where DLT and non-DLT technologies operate alongside one
another, where there is a need to mitigate possible negative impacts such as
fragmentation. The government will therefore consider carefully the suggestions
made around market coordination and particularly on setting common standards
both within the UK and internationally, to encourage innovation while maintaining
financial stability.

Other UK work to explore the use of DLT and digital

technologies, including Central Bank Digital Currencies
3.35 A number of respondents to the call for evidence noted the potentially
important role central bank digital currencies (CBDC) could play in facilitating the
adoption of DLT in financial markets. The UK is continuing to play a leading role in
exploring the opportunities and risks of CBDCs, and similar innovations which could
support more efficient settlement in wholesale space. At Fintech Week 2021, the
Chancellor announced a new Taskforce led by HM Treasury and the Bank of England
to lead the UK’s exploration of a retail CBDC, with separate forums to engage civil

32
society and technology experts throughout. The government and the Bank of England
have not yet made a decision on whether to introduce a CBDC in the UK, and will
engage widely with industry.

3.36 On 16 April 2021 the Bank of England launched a new omnibus account
model. These accounts allow operators of payments systems to hold funds in the
omnibus account to fund their participants’ balances with central bank money.
Operators of new and existing payment systems can apply to the Bank to open an
omnibus account. We anticipate that this will facilitate the emergence of innovative
payment services, making use of the security of central bank money settlement.
Systemically important payment systems accessing omnibus accounts would be
supervised by the Bank under the existing regulatory framework.

3.37 In addition, London is now home to the new Bank of International Settlements
Innovation Hub. The London hub is focusing its work on CBDC and innovative market
infrastructures amongst other topics, and the Bank is working closely with the Hub.
One of the Hub’s projects this year focuses on how payments in RTGS infrastructures
could be linked (synchronised) with digital asset ledgers and payment systems in other
currencies. The Bank has also experimented through its Fintech Accelerator and
conducted a proof of concept to enable the renewed RTGS to link to innovative DLT-
based infrastructures.

33
Chapter 4
Unregulated tokens and new market developments
3.38 As part of the call for evidence the government sought evidence on risks,
opportunities and regulatory issues relating to unregulated cryptoassets such as
Bitcoin and Ether, where used primarily as an investment or a means of return.

3.39 Most respondents who answered the question saw merit in exploring further
the case for comprehensive regulation of services facilitating investment and trading
of unregulated tokens. Some respondents argued that applying strict requirements
could force consumers to use exchanges and other service providers based overseas
which may seek to offer services to UK consumers without protections or oversight. A
number of respondents highlighted the importance of an open dialogue with the
industry.

3.40 The Call for Evidence also sought evidence on newer cryptoasset
developments, namely decentralised finance, which is a fast-growing sector within
the cryptoasset landscape, encompassing a variety of different activities – such as
lending – on decentralised applications using protocols.

3.41 A common theme among responses was that decentralised finance is a

nascent and fast-evolving technology, which adds an additional layer of complexity
and innovation to the cryptoasset ecosystem, but currently requires a high level of
technical understanding. Several respondents highlighted the potential of
decentralised finance to reinvent and disrupt existing financial service business models
in more efficient and effective structures, offering improved savings yields for example
and cheaper remittances. With it also comes the opportunity for regulatory arbitrage
and the need to ensure that, regardless of technology, the principle of “same risk,
same regulatory outcome” applies.

3.42 Respondents provided feedback a range of specific risks relating to

decentralised finance, including: theft through security breaches; disruption and
financial losses from governance or protocol bugs or errors; risks that decentralised
finance protocols could be used to facilitate financial crime; legal and regulatory
challenges relating to an absence of originating legal controlling body which can be
held liable in the case of fraud or failure. A number of respondents, who answered
this question, recommended continuing to monitor decentralised finance and
considering consumer awareness measures to communicate risks as well as further
guidance on how activities may fall within the current FCA perimeter.

3.43 Following consideration of the responses, HM Treasury is continuing to assess

the appropriate regulatory response to broader cryptoassets (i.e. beyond stablecoins
used as a means of payment). In line with stakeholder views, the government will
continue to monitor this fast-growing area of financial services, and will work
collaboratively with the UK financial regulators and industry to consider appropriate
future regulation. The government will also continue to work closely with
international partners, to ensure common standards which enable innovation and
harmonise guidance and concepts. HM Treasury will consult later in 2022 on its
proposed approach.

34
35
HM Treasury contacts

This document can be downloaded from www.gov.uk

If you require this information in an alternative format or have general

enquiries about HM Treasury and its work, contact:

Correspondence Team
HM Treasury
1 Horse Guards Road
London
SW1A 2HQ

Tel: 020 7270 5000

Email: [email protected]

36