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Crypto and Insolvency Brochure

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The U.K. Regulatory Perimeter for Digital Assets HMT's FMI SAR Consultation (discussed on slide 4) proposes to implement a modified FMI SAR as the primary legal framework to address the failure of systemic DSA firms which are not banks. The adapted FMI SAR would cover stablecoins used for payment and other digital assets used for payments or settlement. The primary objective of the framework is to allow a firm's services to continue ahead of the interests of its creditors and allow administrators to consider the return of customer funds and private keys. The proposal includes an additional objective covering the return or transfer of funds and custody assets, including the transfer of coins to another stablecoin issuer, which may only be considered when the FMI SAR is applied in relation to systemic DSA firms. Stablecoin firms that are deemed systemically important will also be subject to supervision by the Bank of England, meaning that they will be authorized by the FCA and recognized by the Bank of England, and the Bank will be the lead prudential regulator, including in the administration of a systemic DSA firm. The Bank of England would be given the power to direct administrators as to which objectives should take precedence in an administration (continuity of service or return / transfer of funds and custody assets) but would be required to consult the FCA before a special administration order was sought for stablecoin issuers. The FMI SAR would take precedence over the Payment and E-Money Special Administration Regime (PESAR), where both the FMI SAR and the PESAR apply to a firm. The consultation closes on August 2, 2022, after which HMT will review submissions and publish its own response. HMT's separate Cryptoasset Consultation Response resolved that the U.K. Government should introduce a regulatory regime for stablecoins. On July 20, 2022, the U.K. Government published the FSMB which, among other things, provides for the regulation of digital settlement assets (DSAs) which it defines as "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)." As anticipated in the Cryptoasset Consultation Response, the FSMB provisions in relation to DSAs largely apply to stablecoins. Sections 21 and 22 of Schedule 6 of the FSMB propose amendments to the Bank of England's oversight of payment systems established under the U.K. Banking Act 2009 and to extend a section of the existing Financial Services (Banking Reform) Act 2013 to payment systems involving DSAs. The FSMB also provides that the Treasury will retain the power to make and modify regulations as it considers appropriate in connection with (among other things) (i) payments that include DSAs; (ii) recognized payment systems that include arrangements using DSAs, recognized DSA providers and service providers connected with or in relation to such systems and providers and (iii) insolvency arrangements in respect of the systems and providers mentioned in (ii). However, the Treasury will be required to consult the FCA, the Bank of England and other applicable payments regulatory bodies before making such regulations. As the FSMB has just been introduced to Parliament, it will undergo examination and consultation before becoming law. The bill's progression (including any amendments made to it) will be keenly monitored by those working in or advising in this area. Cryptoassets & Insolvency 25

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