On 6 November 2023, the Financial Conduct Authority (FCA) and Bank of England (BoE) published discussion papers on their proposed approach to regulating stablecoins, and the Prudential Regulation Authority (PRA) published a Dear CEO letter on innovative uses of deposits, e-money and stablecoins. The FCA, BoE and PRA also published a joint “roadmap paper” aimed at explaining how the proposed regimes interact and the regulators’ proposed approach for dual regulation.
The publications follow HM Treasury’s recent Policy Statement which set out its intention to define fiat-backed stablecoins in legislation, expecting it to capture those stablecoins which seek to maintain a stable value by reference to a fiat currency, and hold (in part or wholly) currency as “backing”. HM Treasury is also considering making changes to the payments legislation to enable retail payments for goods and services to be made using fiat-backed stablecoins, including a potential option to allow certain stablecoins issued outside the UK (so-called “overseas stablecoins”) to be used for payments.
FCA DP23/4: Regulating cryptoassets Phase 1 – Stablecoins
The FCA’s discussion paper, DP23/4, sets out its 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.
The FCA notes that the design of its new regime for regulating these activities is not entirely separate from the rest of the future regime. Various aspects, including, for example, its expectations of firms that provide custody of regulated stablecoins (or the cryptographic “private keys” to access them) would likely be the same when they provide custody of other types of cryptoassets that come into regulation.
The proposals are intended to be of interest to anyone in the UK who has bought, or may in the future buy, fiat-backed stablecoins, as well as organisations and individuals that participate in the cryptoasset sector (specifically, cryptoassets that claim a form of stability and make use of a stabilisation mechanism).
Feedback on DP23/4 is invited by 6 February 2024. The FCA will consider that feedback to decide its next steps, and will consult on any of the proposals from DP23/4 that it proposes to adopt as part of its final rules. In addition to new Handbook rules, it will also consider whether there are other aspects of the existing rules that may need changing, raising with HM Treasury and other stakeholders if necessary.
BoE discussion paper: Regulatory regime for systemic payment systems using stablecoins and related service providers
The BoE’s discussion paper outlines how the BoE would regulate operators of systemic payment systems using stablecoins – payment systems which, if widely used for retail payments in the UK, could otherwise pose risks to financial stability. The BoE would also regulate other entities providing services to these payment systems, e.g. stablecoin issuers and wallet providers, where they could otherwise pose financial stability risks.
The discussion paper sets out the BoE’s proposed regulatory framework for these systemic payment systems, focusing on sterling-denominated stablecoins because it considers these are the most likely digital settlement assets to be used widely for payments. Part one of the paper outlines the BoE’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. The BoE explains that it intends to follow a similar regulatory approach as for other payment systems, but will adapt it appropriately. There will be new regulatory requirements to cover both the risks of stablecoins as a new form of money and a means of payment.
Like the FCA’s DP23/4, views on the BoE’s discussion paper are sought by 6 February 2024. The BoE notes that the paper represents an exploratory phase in developing the new regime, after which it will consider the responses received and consult on its final proposed regime. The regime may be adapted over time as the nascent industry evolves.
PRA Dear CEO letter
The Dear CEO letter published by the PRA sets out how it expects deposit-takers to address the risks that arise from issuing multiple forms of digital money – and in particular, risks that may arise in relation to the availability in parallel of deposits, e-money and regulated stablecoins – to retail customers, 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 PRA asks deposit-takers to read the letter in conjunction with the BoE and FCA discussion papers and the regulators’ joint roadmap (discussed below), as well as HM Treasury’s recent Policy Statement on stablecoins. It also asks deposit-takers to keep their supervisor(s) updated about any material developments in their planned innovations in the use of digital money or money-like instruments, and how their plans meet the expectations set out in the letter. The PRA says it will continue to monitor developments and to work with other UK authorities on the development of the overall regulatory framework.
Joint roadmap paper
The cross-authority roadmap paper published by the FCA, BoE and PRA sets out the regulators’ approach to innovation in payments, money and money-like instruments. It explains how UK authorities’ current and proposed regulatory regimes will interact and should be read in conjunction with the other publications outlined above.
The regulators explain that they have published their approach jointly to enable them to prevent regulatory arbitrage, provide certainty to firms and developers about the regime applicable to them based on the form of money or money-like instrument they want to issue, and maintain the confidence of households and businesses in their ability to make payments on a daily basis.
They also note that the regime(s) applicable to firms engaged in issuing different forms of money and money-like instruments and operating payment systems will depend on the purpose of their business, how it is conducted, and the risks it presents. Business models may range from issuing the digital money or money-like instruments with the primary purpose of generating revenue by providing payment services, to business models where revenues are generated primarily through maturity transformation. In the latter case, client funds are received and used to invest in risky assets that offer uncertain returns. E-money institutions are an example of the former business model and banks an example of the latter. The regulators note that these business models take very different types of risk, and this is reflected in the applicable regulatory regime.
The roadmap sets out the regulators’ approach in relation to three categories of digital money and money-like instruments that are in use or in prospect – e-money, stablecoins, and “tokenised” bank deposits.