The UK’s journey towards regulating crypto-assets was initiated in January 2021, upon the Government publishing its consultation covering the UK Regulatory approach to crypto-assets and stablecoins¹, followed by its response paper in April 2022.
Following this, HM Treasury, the Bank of England (BoE), and the Financial Conduct Authority (FCA) published its policy package in November 2023 - which included a range of measures and initiatives to kick-start the next stage of designing the UK’s regulatory approach to crypto-assets:
- HM Treasury: Update on Plans for the Regulation of Fiat-backed Stablecoins
- BoE/FCA: Cross-authority roadmap on innovation in payments
- PRA: ‘Dear CEO Letter’
- FCA: Regulating cryptoassets Phase 1: Stablecoins (DP23/4)
- BoE: Regulatory regime for systemic payment systems using stablecoins and related service providers
Estimated timeline for regulators’ next steps on stablecoins
Innovate Finance has responded to the FCA and BoE Discussion Papers, see details below for each of the submission papers.
Innovate Finance views on FCA proposals to regulate stablecoins as a means of payments
Innovate Finance welcomes the opportunity to respond to the FCA’s ‘Phase 1’ proposed approach to developing the regulatory regime for fiat-backed stablecoins usage within UK payments. This includes covering the issuance (issuer firms), and custody (custodian firms) of stablecoins within means of payments, subject to the Payments Services Regulations 2017. As such, the Discussion Paper seeks to consult on the following proposals;
- Backing assets, redemption, and other requirements on issuers.
- Custody requirements.
- Organisational requirements.
- Business conduct.
- Prudential requirements.
- Managing instances of failure.
- Applying existing payment regulations.
- Overseas stablecoins within UK payments.
Innovate Finance supports the overall intention set out in the DP to create a regime for fiat-backed stablecoins, including when used as a means of payment. We have previously advocated for a clear regulatory roadmap for the regulation of crypto assets in the UK and see this regime as an important step in the process. However, it should be noted that the DP is one component of the overall regulatory framework, and we urge the FCA to continue developing its wider policy approach for other elements of the crypto asset roadmap to ensure the UK maintains momentum and keeps up with other jurisdictions.
Summary of response;
- Full consideration of the cost of compliance: While Innovate Finance recognises the need to ensure market integrity and consumer protection, our members believe that any final rules must provide sufficient proportionality and flexibility to ensure that high direct costs do not lead to resulting indirect costs.
- Enable issuer firms to retain revenue from backing-assets: It is important that in designing a proportionate regulatory framework, there is a balance between market integrity, consumer protection, and promoting effective competition in the interest of consumers.
- Clarity over overseas stablecoin access to UK payments: In principle, we welcome the novel approach the UK is considering in relation to overseas stablecoins within the ‘payment arrangers’ instrument. However, our members are concerned that the idea may struggle to get off the ground due to the level of uncertainty and lack of clarity about how it would work in practice.
You can read Innovate Finance’s full submission, here
Innovate Finance views on Bank of England’s regulatory regime for systemic payment systems using stablecoins and related service providers
Innovate Finance welcomes the opportunity to respond to the Bank of England’s proposed approach to regulating GBP-denominated payment systems using stablecoins, between the issuance function stage, to the store of value and exchange of value function for coin holders. The Discussion Paper seeks to consult on the following proposals:
- Expanding the BoE’s scope towards ‘systemic’ payments.
- Requirements for the transfer function.
- Requirements on backing assets.
- Requirements on wallet holders.
Innovate Finance recognises that the approach has been designed with the best of intentions, however, our members have several concerns that if enacted as conceived could lead to a stifling of innovation due to the narrow commercial parameters in which systemic payment systems using stablecoins could operate.
Summary of response;
- Transition between regulatory regimes: In contrast to the Bank’s proposed approach, the FCA regime would allow issuers to generate returns from the underlying stablecoin assets. Any stablecoin issuer that built a business under the FCA regime and began to scale to a point which prompted supervisory conversations about potentially being designated systemic would need to undergo a potential business model pivot which may be impractical.
- Commercial viability and scope for innovation: The DP sets out a framework for issuers where they can derive income solely in exchange for payment services, arguing that business models that are focused on generating returns on backing assets would be more suited to other regulatory regimes, such as the banking regime. Our response highlights that this fails to recognise the different risks associated with stablecoin business models compared to banking.
- Designation process: Part 5 of the Banking Act 2009 sets out certain criteria that will be considered in a possible systemic designation order, but the Act itself does not provide any clear metrics (e.g. number or value of transactions), while other criteria are also hard for firms to judge (e.g. threaten the stability of or confidence in, the UK financial system).
You can read Innovate Finance’s full submission, here
¹ UK Gov: UK regulatory approach to cryptoassets and stablecoins: consultation and call for evidence.
² UK Government: The Payment Services Regulations 2017.
