What is a "Stablecoin Used as a Means of Payment"?

The UK government is doing a lot of strange things with existing financial regulation, while trying to absorb new concepts, such as those relating to cryptoassets. Buried amidst the pile of economy-shrinking, post-Brexit deckchair rearrangement in the new Financial Services Bill (explanatory notes here) is an attempt to regulate 'stablecoins used as a means of payment'. This post tries to make sense of that. 

Existing UK regulatory view of stablecoins

In a previous policy statement, the Financial Conduct Authority explained its view that 'stablecoins’ (a.k.a. ‘stable tokens’) are cryptoassets that are structured in order to (try to) stabilise their value, e.g. by ‘pegging’ them to a fiat currency or different types of assets (including other cryptoassets (‘crypto-collateralised’)) or specified financial investments (regulated securities) or commodities (‘asset-backed’)).  

That interpretation means that stablecoins may currently fall within existing e-money/payments regulation and/or securities regulation (as a derivative, a unit in a collective investment scheme/fund, a debt security, or another type of specified investment) provided they meet all the applicable critieria, regardless of the fact they are issued using 'distributed ledger technology' or on a 'blockchain'. Those regulatory criteria vary depending on the nature of the underlying assets, the rights granted by such tokens and other relevant 'arrangements' or other activities, like whether advice is given. 

The FCA has said that 'algorithmically stabilised tokens' or stablecoins which attempt stabilisation through algorithms that control the supply of the tokens to influence price, for example, should only be regulated to the same extent as other (financially) 'unregulated' tokens are. Examples of unregulated cryptoassets or tokens include 'bitcoin' (classified as an 'exchange token' rather than as a means of payment) or 'utility tokens' that merely grant access to a game or system, for example.

Aside from stablecoins and other cryptoassets that trigger existing regulation, the FCA explained that it needs new statutory powers to regulate cryptoassets.

The new approach to Stablecoins - DSAs

The new Financial Services Bill itself makes no reference at all to 'cryptoassets' or even 'stablecoins', but the explanatory notes do. 

Of course, this instantly expands the lawyers' playground of unintended consequences, so I'm not really complaining professionally. 

The explanatory notes essentially recite the earlier FCA consultation [although the notes ominously refer to Bitcoin as an example of "cryptoassets used primarily as a means of investment" rather than 'exchange', perhaps signalling a shift in the government's approach to the regulation of cryptoassets and related activities more widely, due to be announced later in 2022.]

In relation to stablecoins, the explanatory notes say that the Bill empowers the Treasury to: 

• establish an FCA authorisation and supervision regime, drawing broadly on existing electronic money and payments regulation, to mitigate conduct, prudential and market integrity risks for issuers of, and payment service providers using, stablecoins; 

• regulate (via the Bank of England) any systemically significant stablecoin-based payment system, in a similar way that Visa, Mastercard and a range of other designated "payment systems" are controlled by the Payment Systems Regulator (PSR);

• empower the PSR to regulate payment systems using stablecoins, following designation by the Treasury, to address issues relating to competition innovation, user interests and access; 

• apply the Financial Markets Infrastructure Special Administration Regime (FMI SAR), which is a bespoke administration regime for recognised payment and settlement systems and recognised service providers, to stablecoin firms that have been recognised by HM Treasury, with appropriate modifications. This will ensure appropriate tools are in place to mitigate the risks to financial stability associated with a systemic stablecoin firm’s failure; 

• Amend or disapply existing financial regulators' rules to avoid systemic stablecoin firms being subject to conflicting requirements in areas relating to financial stability. 

For these purposes, however, the Bill uses the term "digital settlement asset" instead of 'stablecoin':

""digital settlement asset" [or "DSA"] means a digital representation of value or rights, whether or not cryptographically secured, that— 

(a) can be used for the settlement of payment obligations, 

(b) can be transferred, stored or traded electronically, and 

(c) uses technology supporting the recording or storage of data (which may include distributed ledger technology)."

For most purposes a DSA "includes a right to, or interest in, a [DSA]." This reflects the definition of "cryptoasset" in the Money Laundering Regs.

The Bill gives the Treasury power to regulate DSAs by applying e-money/payments and payment systems regulation to them, including the power to change the statutory definition itself! 

The Bill creates the concept of "DSA service providers" which includes anyone directly involved in: 

• issuance/creation of DSAs, 
• safeguarding or safeguarding and administration (custody) of the DSAs including the private cryptographic keys (or means of access) [not clear whether this service must include the keys/means of access, or would be satisfied if the provider only safeguarded the keys/means of access];
• exchange or arranging the exchange of DSAs for money and/or other DSAs or vice versa ("digital settlement asset exchange providers" is defined pretty much like cryptoasset exchange providers under the Money Laundering Regs), 
• rule/standards-setting; and 
• any service that facilitates, or supports, a transfer of money or digital settlement assets to be made using the payment system, including any infrastructure provider in relation to the system.

Unintended consequences?

Right now your brain should be fizzing with other things that could be DSAs; and even whether any existing components of payment systems or services could qualify as DSAs or DSA services and therefore require a currently unregulated/unauthorised service provider to become authorised as a "DSA service provider".

It is also worth watching the evolution of "data objects" as a new class of personal property with distinct rights and remedies.