UK Treasury opens consultation on proposed insolvency regime to manage stablecoin failure | Cadwalader, Wickersham & Taft LLP

On May 31, 2022, the UK Treasury announcement a consultation on government proposals to address the failure of systemic digital settlement asset (“DSA”) businesses (including stablecoins) by adapting the Special Administration Regime of Financial Market Infrastructure (“ IMF SAR”) existing.

According to a article in the FinancialTimes, the Treasury said that the failure of a systemic stablecoin could jeopardize the “continuity of services essential to the functioning of the economy and the access of individuals to their funds or assets”. The failure of the terra stablecoin has greatly heightened concerns among many regulators about the lack of transparency and potential weaknesses in the market. The Treasury said “events in the crypto-asset markets have further underscored the need for appropriate regulation to help mitigate risk to consumers, market integrity and financial stability.”

The government considers that the Bank of England (‘BoE’) and not the Financial Conduct Authority (‘FCA’) should be the primary regulator in the administration of systemic DSA companies. It is proposed that the BoE be given the power to lead an appointed administrator. According to the consultation, the government intends to amend the IMF SAR to include an additional objective covering the return or transfer of funds and assets on deposit which can only be taken into account when the IMF SAR is applied to companies DSA systems. In addition, it is suggested that the BoE consult the FCA (1) before issuing instructions to administrators regarding the objectives of the scheme and (2) when seeking a special administration order for a systemic DSA business subject to the regulatory requirements imposed by both BoE and CIF. The government said the new rules would “allow administrators to consider the return of customer funds and private keys as well as continuity of service”.

The Treasury requested answers to the following questions:

  1. Do you have any comments on the intention to designate the IMF SAR as the primary regime for systemic DSA companies that are not banks?
  2. Do you have any comments on the intention to establish an additional objective for the IMF SAR focused on the return or transfer of customer funds, similar to that found in the Special Administrative Regime for Payments and Electronic Money, to apply only to systemic DSA companies?
  3. Do you have any comments on the intention to give the BoE the power to direct the administrators and to introduce new regulations in support of the IMF SAR to ensure that the additional objective can be managed effectively, or what other regulation might be necessary?
  4. Do you have any comments on the intention to require the BoE to consult the FCA before seeking an administrative order or directing administrators in the event of regulatory overlap?

Submissions must be made by August 2, 2022, after which the government will review all submissions and publish its response.

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