United Kingdom (UK) stablecoin regulation begins to take shape in multiple FCA, BOE documents

Although it is not scheduled to go into effect until 2025, fresh papers from the Financial Conduct Authority (FCA) and the Bank of England (BOE) offer light on regulators’.On November 6, a set of documents concerning stablecoin regulation was issued in the United Kingdom (UK). The Financial Conduct Authority (FCA) and the Bank of England (BOE) both issued discussion papers. In addition, the Bank of England’s Prudential Regulatory Authority (PRA) issued a letter to CEOs of deposit-taking banks, and the Bank of England (BOE) issued a “cross-authority roadmap” to connect them.On Oct. 30, His Majesty’s Treasury set the tone for the frenzy of disclosures with a short document previewing regulatory plans. The Financial Conduct Authority (FCA) study went into considerably deeper detail on the same subject.

The Financial Conduct Authority (FCA) stated that stablecoin regulation is the first step towards broader crypto-asset regulation. Potential retail and wholesale stablecoin use cases were detailed in the discussion paper. Its topics of discussion were auditing and reporting, the backing of coins owned by the issuer, and the independence of the custodian of the underlying assets.

The article focused on how the idea of “same risk, same regulator outcome” could be used. It advocated organizing business affairs utilizing the existing client assets regime as the basis for redemption and custodianship rules, as well as the senior management arrangements, systems, and controls sourcebook. There are already operational resilience and financial crime frameworks in place, among many others. The FCA is considering extending existing prudential criteria for licenced stablecoin issuers and custodians from the existing framework to additional crypto assets in the future.

The BOE paper investigated the application of retail-focused stablecoins based on sterling in systemic payment networks. It looked at the transfer function as well as the rules for wallet providers and other services, and it overlapped with the FCA’s consideration of stablecoin issuers and deposit protection. The BOE stated that it will “rely on” the Financial Conduct Authority to regulate custodians, although also left open the prospect of implementing its own rules if necessary. Anti-Money Laundering and Know Your Customer regulations for non-hosted wallets and off-chain transactions were mentioned as potential regulatory stumbling blocks.

The Bank of England (BOE) PRA letter emphasised the importance of distinguishing “e-money or regulated stablecoins” from other types of deposits: “With the emergence of multiple forms of digital money and money-like instruments, there is a risk of customer confusion, particularly among retail customers, if deposit-taking entities offer e-money or regulated stablecoins under the same branding as their deposits.”

Deposit-taking institutions’ innovation should be limited to deposits. The PRA recommended that issuance activities have separate branding. An issuer who wishes to accept deposits should act immediately and consult the PRA in the process. Finally, it reminded me that innovations in deposit-taking are likewise subject to norms and restrictions. 

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