Assessing the proposals for the UK’s stablecoin regulation

The government still has aspirations for the UK to be a global crypto hub, therefore building a regulatory regime for the use of a GBP-backed stablecoin as a mode of payment is integral to integrating digital assets into the domestic payments ecosystem.

UK Finance and its members welcomed the recent opportunity to respond to both the Bank of England and FCA discussion papers on their respective regulatory regime proposals for stablecoins.

Overall, our members were supportive of the proposed principles underpinning backing assets and redemption. These principles aim to ensure those who deposit their pounds in return for stablecoin tokens are guaranteed to redeem tokens at par, have confidence in the stablecoin retaining value and have protection in instances of firm failure.

However, in our response to the consultations we explored whether these good outcomes for consumers could still be achieved with a more flexible approach to the backing assets. There may be ways in which the UK can design requirements for backing assets. These suggestions could increase revenue and ease liquidity. This would increase the likelihood of firms having the ability to innovate on their products and services, and potentially provide consumers with a better user experience. We also noted the potential ‘cliff edge’ between the Bank and the FCA regimes, mainly caused by their different approach to backing asset requirements.

Our members are generally positive about the proposals for one day redemption. However, more consideration should be given to provide firms with flexibility where they suspect potential financial crime and fraud. This would be in line with other payment regime regulations and would allow firms to conduct timely reviews of suspicious redemption requests.

There was good recognition from members of the FCA’s intention and effort to find an appropriate route for overseas stablecoin issuers to participate in the UK market. The involvement of a private entity in an equivalence regime is an entirely new concept for UK regulation. Therefore, more clarity is needed on the FCA’s expectations for such ‘payments arrangers’. Clarity here would give confidence to the market that overseas stablecoins are properly assessed against the UK’s regulatory standards. 

Another key consideration for the Bank and the FCA is to distinguish between wholesale and retail use cases and to manage client categorisation accordingly. The UK’s traditionally open market is key to its international competitiveness, and it was felt that the FCA could factor this into its views on the territorial scope of a possible wholesale regime.

Members continue to support the principle of ‘same risk, same regulation’. Accordingly, we flagged concerns that security tokens (traditional securities that have been tokenised) appeared to be given the same custody treatment as stablecoins and crypto assets. In our response we noted that custodians should have the responsibility to safeguard a security in whatever form it is issued.

Given stablecoins today are predominantly used as a bridging asset for the cryptoasset ecosystem, this should remain an important feature of the design of the regulatory regime, especially insofar as it is facilitating value transfer from the cryptocurrency ecosystem to the fiat economy. Building a regulatory regime that will support stablecoin retail payments could provide UK consumers with the option of converting unbacked cryptoassets into a regulated mode of payment with greater ease and cost efficiency than converting cryptocurrency into GBP.

The Bank of England and the FCA have taken a positive step forward in bringing stablecoins into the scope of its regulatory perimeter, and we are eager to facilitate discussions on how the UK can realise the benefits of cryptoassets.