Stablecoins may soon be part of the monetary system in the U.K. if the new Financial Services and Markets Bill is approved in Parliament.
The U.K. government introduced yesterday, July 20, a bill in the parliament that will modify existing banking regulations to include stablecoins and other crypto assets, denominated in the law as Digital Settlement Assets (DSA), as part of the U.K. payment system.
DSAs are defined in the law as a “digital representation of value or rights, whether or not cryptographically secured, that can be used for the settlement of payment obligations, can be transferred, stored or traded electronically, and uses technology supporting the recording or storage of data (which may include distributed ledger technology)”.
“To ensure the U.K. remains at the forefront of new technologies and innovations, the Bill will enable certain types of stablecoins to be regulated as a form of payment in the U.K.,” said Nadhim Zahawi, Chancellor of the Exchequer.
The proposed amendments to the banking regulations would provide legitimacy to DSA and it would enable the Bank of England to supervise these types of digital assets.
But in addition to the formal recognition of DSAs in the law, the proposed bill also grants new powers to the Treasury to issue regulations in connection with the regulation of payments that include DSA. These provisions are to be understood widely. According to the text of the bill, the new powers the Treasury would have include: applying legislation relating to the regulation of electronic money and payments to digital settlement assets, insolvency arrangements, conferring powers on a relevant regulator (including the power to make rules), modifying legislation, imposing fees payable to a relevant regulator and imposing enforcement obligations.
Under the new legislation, the Treasury must consult before making any regulations with the relevant regulators, which are the Financial Conduct Authority, the Bank of England (BoE) and the Payment Systems Regulator.
The modifications to the banking regulations will also include provisions to regulate DSA providers like digital asset issuers, exchange platforms or wallets providers. For the moment, these modifications to the law will put these new players into the legal framework and will allow the government to issue rules to establish new obligations.
In light of the recent scandals with the collapse of certain stablecoins and the potential systemic risks that major stablecoins could cause to the economy, the government is also designing new measures to exercise more control over these assets. To this end, the proposed bill gives powers to the Treasury to issue “recognitions orders” for certain digital assets. This is the decision to name a DSA service provider as a “recognized DSA service provider” when the disruption in the provision of that service could threaten the stability of the U.K. financial system or have serious consequences for business in the U.K.
This is a similar provision to the one established by the EU in the Markets in Crypto Assets Regulation (MiCA) for stablecoins of “significant importance.” The Treasury will consider different elements before issuing a recognition order such as the value of the assets, the nature of the service in relations to payments systems that the DSA provider provides and the relationship with other operators of payment systems.
Similarly to the EU, the new U.K. bill also provides the banking authority, the BoE, powers to supervise recognized DSA service providers.
The Financial Services and Markets Bill is not as comprehensive as MiCA and doesn’t regulate every single aspect of crypto assets, but it paves the way for future rules in this space. But most importantly, it represents the first legal step to recognize certain types of crypto assets as a valid method of payment in the U.K.
Lawmakers in the House of Commons will start the second reading of the law on Thursday.
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