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UK financial authorities publish proposals for regulating stablecoins

FCA and Bank of England: the focus on stablecoins is part of a crypto-related regulatory overhaul | Credit: FCA and Ian Hall

The UK’s Financial Conduct Authority (FCA) and Bank of England (BoE) have this week presented their proposed approach to regulating so-called stablecoins.

The publication of two discussion papers, as well as a ‘roadmap paper’ and documents including a stablecoins ‘explainer’, constitute the latest milestone in UK authorities’ journey to introduce a ‘comprehensive cryptoasset regulatory regime’.

Stablecoins are digital assets that aim to maintain a value relative to a specified asset or basket of assets, for example, a fiat currency – a small number are linked to the British pound. This differentiates them from the typically more volatile and certainly more controversial orbit of unbacked cryptoassets.

‘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,’ the FCA and BoE jointly state, adding that they aim to protect consumers and prevent money laundering ‘with a robust set of rules and to safeguard financial stability’.

With UK regulation apparently some way off being finalised, however, the FCA states that it ‘continues to warn people that cryptoassets, including stablecoins currently, remain largely unregulated and high-risk, with no protections if something goes wrong.’

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Stablecoins regulation: discussion time

The FCA’s ‘Regulating cryptoassets Phase 1: Stablecoins’ discussion paper, which runs to 110 pages, poses 40 questions, including questions exploring views on the advantages and disadvantages of different types of limits (to stablecoin use). The BoE’s ‘Regulatory regime for systemic payment systems using stablecoins and related service providers’ discussion paper poses 32 questions. Both have a deadline for responses of 6 February 2024.

At the same time a ‘Cross-authority roadmap paper on innovation in payments and money’ has been published by the FCA, BoE and Prudential Regulatory Authority (PRA). This seeks to explain how UK authorities’ current and proposed regulatory regimes for issuers of different forms of digital money or ‘money-like instruments’ will interact.

In addition, the PRA has published a 13-page ‘Dear CEO…’ letter – titled ‘Innovations in the use by deposit-takers of deposits, e-money and regulated stablecoins’ – that sets out 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 (AML)/counter-terrorist financing (CFT), and liquidity and funding risks.

The documents’ arrival follows the publication of a 21-page ‘Update on Plans for the Regulation of Fiat-backed Stablecoins’ by HM Treasury (HMT) on 30 October. This followed an HMT consultation (from February to April this year) on plans to ‘robustly’ regulate a ‘broad suite’ of cryptoasset activities.

‘The government’s ambition to make the UK a global hub for cryptoasset technologies remains steadfast,’ economic secretary to the Treasury Andrew Griffith wrote in last month’s 94-page government response to the consultation. He spoke in April about “fostering innovation by making the UK a safe jurisdiction for cryptoasset activity”.

RELATED ARTICLE UK Treasury consults on crypto as FCA flags ‘very high’ risks – a news story (11 January 2021) on HMT’s launch of a consultation and call for evidence on regulating cryptoassets and stablecoins

Stablecoins’ ‘potential’ for payments

“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,” said FCA executive director for consumers and competition Sheldon Mills in a joint-announcement by the authorities.

“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,” Mills added.

“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,” said BoE deputy governor for financial stability Sarah Breeden in the same joint-announcement. “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.”

The documents’ publication comes more than five months after European parliamentarians voted overwhelmingly to approve the Markets in Crypto Assets (MiCA) regulation (now known as MiCAR) for the European Union (EU). The 27-member bloc’s financial services commissioner, Mairead McGuinness, said at the time that she hoped the new rules ‘could become a model for other countries’. The UK left the EU almost four years ago.

The European Banking Authority (EBA) has itself this week launched three consultations on draft regulatory technical standards (RTS) related to the liquidity requirements for issuers of stablecoins and other types of digitised tokens. These consultations, which run to 8 February 2023, form part of the prudential package of MiCAR deliverables.

RELATED ARTICLE European Parliament backs crypto rules to put EU ‘at forefront of token economy’ – a news story (25 April 2023) on European parliamentarians voting to approve the Markets in Crypto Assets (MiCA) regulation, making the EU the world’s first major jurisdiction to establish a comprehensive regulatory framework for cryptoassets

King’s Speech’s fintech significance

The UK has also this week seen the first King’s Speech in more than 70 years, following the death of the Queen last year, and King Charles’s first as monarch (although he stood in for his mother in May 2022).

The set-piece address, which presents the government’s legislative priorities for the coming year, included mention of the introduction of “new competition rules for digital markets and encourag[ing] innovation in technologies such as machine learning”.

These were, respectively, references to two parliamentary bills relevant to many of those working in finance, technology and at their nexus – fintech: specifically, the Digital Markets, Competition and Consumers Bill; and Data Protection and Digital Information (DPDI) Bill.

The former bill would give the Competition and Markets Authority (CMA) new powers ‘to enable it to tackle anti-competitive activity swiftly and effectively’.

The latter bill aims to ‘establish a framework for secure digital verification services, enabling people and businesses to make the most of new technologies with confidence, facilitating smoother, cheaper online transactions, and enabling individuals to prove things about themselves digitally in a secure and trusted way – if they choose to do so’; ‘enable “smart data” schemes across the economy to ensure everyone benefits from lower prices from schemes like “open fuel”, and trusted, innovative services like “open banking”’; and ‘ensure the better use of data in delivery of health and adult social care, law enforcement, security, and other government services to increase efficiency and the quality of services for individuals’.