On 11th October, 2022, Circle wrote to HM Treasury’s Payments and Fintech Unit in response to its Consultation on Payments Regulation and the Systemic Perimeter. This response follows Circle’s previous engagement with HM Treasury regarding the Financial Market Infrastructure Special Administration Regime (FMI SAR), submitted in August of 2022.
In its response, Circle wrote in broad agreement with the UK Government and HM Treasury’s objective to bring emerging and innovative digital assets, including stablecoins, into the existing regulatory perimeter of prudential and conduct regulation and supervision in the UK. Circle urged HM Treasury to recognize in detail the fundamental differences between digital assets circulating on public blockchains and traditional inter-bank or closed loop payment systems, and that rules built for closed consortia - such as direct debit, inter-bank settlement, or other systems currently supervised by prudential and conduct regulators in the UK - would not be appropriate for peer-to-peer networks built with the express purpose of removing financial intermediaries prone to failure. Given these fundamental differences, Circle asked HM Treasury for greater clarity into how the Bank of England’s supervisory powers under Part 5 of the Banking Act of 2009 would apply to entities within the context of a payments chain within a stablecoin arrangement, such as issuers, exchanges, custodians, and/or digital wallets.
Circle also requested that HM Treasury provide greater clarity on the nature of systemic designation for digital settlement asset (DSA) firms and their “connected” service providers, and that such clarity would best guide application of the appropriate supervisory relationship for firms in the digital asset space. Circle indicated that the differences under which circumstances payment systems may be designated as systemic, and under which circumstances “DSA service providers” (such as issuers of payment stablecoins) may be designated as systemic, and that an explicit connection between such designations should be made clear by HM Treasury.
Finally, Circle urged HM Treasury to carefully consider the activity-based limits for DSAs and stablecoin issuers that were contemplated in the consultation. Circle noted its concerns regarding the limits that the Bank of England appears to be considering where it deems that payments activity is performed by newly recognised or already Bank of England-supervised entities “at-scale and at-pace”, could be counterproductive in the context of payment stablecoins such as USDC. Circle indicated that the limits contemplated, such as a limit on the overall number of transactions processed, or a cap on the total volume of transactions, could have a chilling effect on the growth of digital assets businesses in the UK, as any perceived restrictions on minting and redemption would likely severely damage market confidence in payment stablecoins. Such limits might also lead to a lack of investment in or a move away from the UK as a place of operations for digital assets business, or lead firms to limit their products and services to UK consumers or businesses. Circle noted that such an outcome would be counterproductive to the UK government’s stated objective to be a hub for digital assets growth, research, and development.