In April 2022, the UK government unveiled its ambition to transform the nation into a center for cryptocurrency asset investment and technology with a focus on stablecoins.
Now, the UK’s Financial Conduct Authority (FCA) and the Bank of England (BoE) have initiated a consultation process for two documents addressing stablecoin regulations, with a focus on ensuring the secure and system-wide use of these assets in future payment systems.
On Nov. 6, a set of documents about stablecoin regulation were released in the UK. Both the Bank of England (BOE) and the Financial Conduct Authority (FCA) published a discussion paper. The BOE published a “cross-authority roadmap” to connect them, along with a letter sent to CEOs of deposit-taking banks by the BOE’s Prudential Regulatory Authority (PRA).
On October 30, His Majesty’s Treasury released a brief paper outlining regulatory ambitions, setting the stage for the barrage of announcements that followed. The identical subject was covered in considerably more detail in the FCA report.
According to the FCA, regulating stablecoins is the first step towards regulating crypto assets more broadly. Potential use cases for stablecoins at retail and wholesale were described in the discussion paper. Its topics of debate were reporting and auditing, the issuer’s coin backing, and the independence of the custodian of the backing assets.
The focus of the article was on potential applications of the “same risk, same regulator outcome” idea. It suggested organizing company affairs utilizing Thisto the senior management structures, systems, and controls sourcebook, as well as the current client assets regime as the foundation for redemption and custodianship policies. Financial crime and operational resilience frameworks are two of the many that now exist.
The FCA is thinking of modifying the current prudential standards for licensed stablecoin issuers and custodians from the current framework and eventually applying it to other cryptocurrency assets.
The BOE study also examined the application of a retail-focused stablecoin based on sterling in systemic payment systems. It included the transfer function, standards for wallet providers, and other services. It also touched on topics that the FCA already covered, such as deposit protection and stablecoin issuers.
The BOE stated that it will “rely on” the FCA to regulate custodians, although it did not exclude the prospect of enforcing its regulations if needed. It identified possible regulatory hot spots. Among these are the Know Your Customer and Anti-Money Laundering regulations for off-chain transactions and unhosted wallets.
The BOE PRA letter stressed the need to preserve clarity regarding the distinction between “e-money or regulated stablecoins” and other forms of deposits:
“With the emergence of multiple forms of digital money and money-like instruments, there is a risk of confusion among customers, especially retail customers, if deposit-taking entities were to offer e-money or regulated stablecoins under the same branding as their deposits.”
Institutions that accept deposits ought to restrict their innovation to deposits. The PRA recommended that issuance activities should have unique branding. If an issuer wants to accept deposits as well, they should act promptly and collaborate with the PRA. Lastly, it pointed out that guidelines and specifications also limit advances in deposit-taking.
A timeframe with a 2025 implementation date was specified in the BOE roadmap.