The regulators have published discussion papers on their proposed approach to regulating stablecoins, and the PRA published a Dear CEO letter on innovative uses of deposits, e-money and stablecoins.
The three regulatory authorities also published a joint “roadmap paper” aimed at explaining how the proposed regimes interact and the regulators’ proposed approach for dual regulation.
The proposed regulatory approach looks to harness the potential benefits stablecoins could provide to UK consumers and retailers, in particular by making payments faster and cheaper and therefore to safeguard financial stability.
UK global crypto hub
Regulating stablecoins is the first phase in UK Government’s plans to introduce a comprehensive cryptoasset regulatory regime, one of the goals set by crypto-advocate PM Rishi Sunak to make the UK a global hub for cryptoasset technology and investment.
The government set out its approach in HM Treasury’s policy statement: Plans for the Regulation of Fiat-backed Stablecoins, published on October 30. HMT plans to give the FCA powers to make rules about the issuance and custody of fiat-backed stablecoins in the UK under the Regulated Activities Order 2001 (RAO).
HMT is also considering making changes to the payments legislation to enable retail payments using fiat-backed stablecoins, including the allowance of certain “overseas” stablecoins (issued outside the UK), to be used for payments.
There is a full summary of these proposals on GRIP, written by a team from Brown Rudnick – UK Government confirms final proposals for cryptoasset regulation.
FCA Discussion Paper
The FCA’s Discussion Paper (DP 23/4 Regulating cryptoassets Phase 1: Stablecoins) explores the proposed regulation around issuing and holding stablecoins that claim to maintain a stable value relative to a fiat currency by holding assets denominated in that currency.
Under the proposals, the FCA will regulate the issuance and custody of fiat-backed stablecoins under the Financial Services and Markets Act 2000, and the use of these stablecoins as a means of payment under the Payment Services Regulations 2017. DP23/4 is intended to help inform the development of the regime for fiat-backed stablecoins as a means of payment and ensure any regime the FCA creates meets its objectives, so that firms can facilitate payments safely and securely using fiat-backed stablecoins.
Sheldon Mills, Executive Director, Consumers and Competition, FCA, said: “Stablecoins have the potential to make payments faster and cheaper for all, and that’s why we want to offer firms the ability to utilise this innovation safely and securely. Getting views from others is essential for creating proportionate rules that benefit consumers and firms and also meet our objectives.
“We look forward to continuing our engagement with Government, our partners and the wider crypto industry as we move forward with the Government’s first phase in developing the UK’s crypto regulation regime and beyond.”
Bank’s Discussion Paper
The Bank’s Discussion Paper (Regulatory regime for systemic payment systems using stablecoins and related service providers) outlines how the Bank of England would regulate operators of systemic payment systems using stablecoins – payments systems which, if widely used for retail payments in the UK, could otherwise pose risks to financial stability. The Bank would also regulate other entities providing services to these payment systems, such as stablecoin issuers and wallet providers, where they could otherwise pose financial stability risks.
Part one of the paper outlines the Bank’s role in ensuring the safety of money and payments and the scope of the regime, and part two explains the proposed requirements of the regime.
Sarah Breeden, Deputy Governor for Financial Stability, Bank of England, said: “Stablecoins can enhance digital retail payments in the UK. With this comes the need to make sure there is robust and clear regulation in place. Our proposals aim to support safe innovation so that firms can understand the risks they need to manage and ensure that the public can be confident in all forms of digital money and payments.”
PRA also published a Dear CEO letter, on how it expects deposit-takers to address the risks that arise from issuing multiple forms of digital money, while welcoming the benefits that could come from innovation in this area. The letter also sets out the PRA’s broader expectations for banks regarding their use of digital money for retail or wholesale innovations, in areas such as operational resilience, anti money laundering, counter-terrorist financing, and liquidity and funding risks.
The FCA, Bank and PRA have also published a cross-authority roadmap paper on innovation in payments and money, which explains how UK authorities’ current and proposed regulatory regimes for issuers of different forms of digital money or money-like instruments will interact.
The FCA and the Bank welcome feedback from the public and industry by February 6, 2024.
The FCA continues to warn people that cryptoassets, including stablecoins currently, remain largely unregulated and high-risk, with no protections if something goes wrong.