Back in April, the UK announced its intention to become a “crypto hub” after shutting down hundreds of crypto companies that failed to prove their compliance with anti-money laundering and terrorist financing laws.
Notably, the UK was to include stablecoins in the “payments regulatory perimeter” to promote them as a means of payment for UK consumers. According to the Treasury, 27% of stablecoin owners in the UK have already used stablecoins to pay for goods and services, compared with 47% of UK-based crypto owners whose primary motivation was “a gamble that could make or lose money.”
Rather than creating new regulations, the Treasury intended to leverage existing e-money supervisory framework to regulate stablecoin issuance, wallets and custody services. At the same time, stablecoins were to be brought under the authority of the Bank of England through an expansion of the Banking Act. “The government will introduce this legislation when Parliamentary time allows,” the Exchequer concluded.
All that was before Terra’s UST depegged and LUNA collapsed, leaving numberless holders, including in the UK, with massive losses. The meltdown of Terra undermined the crypto community’s trust in stablecoins and spilled out to mainstream media, cooling down the Exchequer’s enthusiasm even as Boris Johnson scrambled to manage the fallout from Partygate.
On Tuesday, the Treasury finally broke its silence to confirm that the plans to push on with stablecoin adoption haven’t changed, but a firm regulatory oversight was needed, especially for digital settlement asset (DSA) service providers of “systemic importance” such as stablecoin issuers and wallet managers. These entities, the Exchequer said, could soon fall under the Financial Market Infrastructure Special Administration Regime (FMI SAR), the Payment and E-Money Special Administration Regime (PESAR), or both.
What are Special Administration Regimes?
The FMI SAR is an insolvency provision that forces a failed payment system to continue operating, even against the interests of the system’s creditors, and obliges managers to obtain the Bank of England’s approval for all proposals “from the outset and on a continuous basis.” The PESAR is similar, but it prioritizes customer refunds and subjugates the managers to the Financial Conduct Authority (FCA).
The Exchequer made clear that it prefers stablecoins to fall under the FMI SAR as it designates the role of the lead regulator to the Bank of England rather than the FCA. For the FMI SAR to fully apply to stablecoins, the Parliament will need to add the requirement to return customer funds, and it’s expected to do so “when parliamentary time allows.” This, however, could be sooner than later as the Exchequer suggested that the recent “events” in the crypto market “highlighted the need for appropriate regulation.”
The Exchequer sidestepped one crucial detail. While the FMI SAR and PESAR are relatively easy to adapt to collateralized stablecoins, algorithmic stablecoins such as UST could prove largely immune.