Thursday, 11 February, 2021
The Digital Regulator
The UK tackles stablecoins
On 7 January 2021, the UK government released a consultation paper that examined recent developments in Distributed Ledger Technology (DLT) and proposed an authorisation regime for stablecoins. Stablecoins have the potential to bring efficiencies to (cross-border) payments, promote financial inclusion, and facilitate the implementation of retail Central Bank Digital Currency (CBDC). The UK emerged as the third jurisdiction to single out and address stablecoins. Switzerland issued guidelines in September 2019, the EU issued regulatory proposals in September 2020, and the Financial Stability Board (FSB) provided a fundamental endorsement of stablecoins in October 2020. The UK government proposes to include stablecoins that can be reliably used for retail or wholesale transactions and that achieve a stable peg to assets such as single currency, multi currencies, or gold within the scope of the regulation. It further proposes to exclude stablecoins that achieve a stable value through algorithms that control their supply. The regulatory requirements would extend to the organisation, operation, and governance of the stablecoin arrangement. Global stablecoins would be subject to additional requirements as well. Existing cryptoasset regulation would be leveraged and extended to cover stablecoins.
The last few weeks have offered several noteworthy regulatory developments in the digital space. On 1 February 2021, the civil law aspect of Switzerland's DLT legislation came into force, allowing the transfer of rights and claims as a ledger-based security on a distributed ledger system without involving any intermediary.The legislator thus honoured a request from the blockchain industry to advance the implementation from 1 August 2021 to 1 February 2021. We have extensively reported on developments in the Swiss DLT law in Digital Regulator December 2020Digital Regulator December 2020link1. This development has allowed cryptobanks, such as SEBA Bank, to issue their Series B Participation Certificates as tokenised equity securities on the blockchain. The FSB and the Bank for International Settlements (BIS) have also anticipated increased focus on stablecoins and CBDC in 2021. Furthermore, the US Office of the Comptroller of the Currency (OCC) has allowed US banks to handle stablecoins for payment activities.
The UK Approach to Stablecoins
The UK Government issued a consultation document titled ‘UK regulatory approach to cryptoassets and stablecoinsUK regulatory approach to cryptoassets and stablecoinslink1’ on 7 January 2021. The initiative followed the government’s Cryptoassets Taskforce report, issued in October 2018, that set the regulatory direction for cryptoassets and enabled the Financial Conduct Authority (FCA) to implement guidelines for the usage of cryptoassets. The consultation document examines recent developments, such as the advent of stablecoins, Decentralized Finance (DeFi), and DLT related financial market infrastructure, and favours stakeholders’ views on a range of issues and proposals, which take a substantive form in relation to stablecoins.
There is a widespread agreement that stablecoins have the potential to bring efficiencies to cross-border payments, promote financial inclusion, and even facilitate the implementation of retail CBDC. The UK becomes the third jurisdiction to address stablecoins by issuing regulatory proposals concerning this innovative cryptoasset class. In 2019, Switzerland was the first jurisdiction to act following the incorporation of the Libra Association in Geneva. The EU presented specific proposals for stablecoins and global stablecoins in September 2021. The FSB fundamentally endorsed stablecoins in October 2020 by issuing recommendations promoting effective regulation, supervision, and oversight of global stablecoin arrangements. The UK approach shares similarities with the Swiss approach as it builds on existing regulation governing cryptoassets and takes a technology-neutral stance. The EU issued a relatively detailed proposal which distinguished between global and non-global stablecoins and presented commonalities with certain aspects of the Swiss FinTech license.
Other Noteworthy Developments
The civil law aspect of Switzerland’s DLT legislation came into force on 1 February 2021. SEBA Bank immediately took the opportunity to issue tokenized assets on the blockchain.
The FSB and the BIS have anticipated increased focus on stablecoins and CBDC in 2021.
The OCC has allowed US banks to use stablecoins for payment activities.
Fresh warnings have been issued by New Zealand and UK authorities about the risks of investing in cryptocurrencies following the sharp increase in the price of bitcoin.
India confirms its negative stance on cryptoassets while eyeing a CBDC and promoting DLT.
Dubai announces plans to improve and expand its regulatory framework for digital assets.
The issuance of regulatory proposals concerning stablecoins by the UK government in January 2021 follows the EU regulatory proposals issued in September 2020 and the Swiss guidelines issued in September 2019. Moreover, the FSB has provided supporting principles in October 2020 which indicate recognition by the authorities of the business case for stablecoins. Stablecoins provide efficiency in cross-border payments and enhanced financial inclusion; they also have a potential role in the implementation of retail CBDC. However, the FSB looks to promote this DLT innovation in a risk-controlled and sustainable environment. Furthermore, regulatory action taken by countries such as the UK creates legal certainty for the private sector’s initiatives related to stablecoins.
The last few weeks have offered several noteworthy regulatory developments in the digital space, including the entry into force of the civil law aspect of Switzerland’s DLT legislation, allowing the transfer of rights and claims as a ledger-based security on a distributed ledger system without any intermediary. The FSB and the BIS have also anticipated increased focus on stablecoins and CBDC in 2021. Furthermore, the OCC has allowed US banks to use stablecoins for payment activities. India also confirmed its negative stance on cryptoassets, while eyeing a CBDC and promoting DLT. Dubai announced plans to improve and expand its regulatory framework for digital assets.
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