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UK regulators publish proposals on a future regulatory framework for stablecoins and discuss the future of “digital money”

Following the three HM Treasury publications on 30th October on the UK’s future cryptoasset regulatory framework, the FCA, PRA and Bank of England each issued further press releases on 6th November. These provide greater detail on each regulator’s approach to aspects of the new framework, and indicate their respective priorities. We will be following up with further detail and analysis over the coming weeks.

Discussion Paper on Regulating cryptoassets Phase 1: Stablecoins

Following last week’s HM Treasury response to its consultation on the future financial services regulatory framework for cryptoassets, the FCA has published a discussion paper setting out how it might regulate fiat-backed stablecoins as a meant of payment.  The paper proposes two means by which a fiat-backed stablecoin may access UK payment chains, i.e. either (i) via UK based fiat-backed stablecoin issuers and custodians; or (ii) in the case of stablecoins issued overseas, following approver by a UK based “payment arranger”.  Each “gateway” would be facilitated by an extension of the regulatory perimeter, i.e. the FSMA (Regulated Activities) Order 2001 and the Payment Services Regulations 2017 (respectively).

Read the full Discussion Paper here.

Discussion Paper on the Regulatory regime for systemic payment systems using stablecoins and related service providers

Linked to the FCA’s Discussion Paper on the potential regulatory framework for fiat-backed stablecoins, the Bank of England (BoE) has set out its proposed role in the regulation of “systemic” payment systems which use stablecoins and related service providers. At this stage, the BoE’s focus is specifically on sterling-denominated payments, and it hasn’t identified any existing stablecoins which would today be brought within its remit as systemic. The proposed regulatory regime for systemic stablecoin systems would include oversight of a variety of business models; whilst the entity providing the payment/transfer function would remain the BoE’s “regulatory hook”, the regime could also capture the stablecoin issuer, the custodian and the provider of the “customer interface” (if different legal entities).

Systemic systems would also have to (i) fully back stablecoins with deposits at the BoE; and (ii) provide for a single “operator” who would assume responsibility for system governance and risk management.  Wallet providers would need to ensure stablecoin-holders can redeem for fiat (at par) at all times.

Read the full Discussion Paper here.

Dear CEO letter: Innovations in the use by deposit-takers of deposits, e-money and regulated stablecoins

The PRA has written to deposit-taking institutions to set out how it expects them to address risks to their customers’ safety, and to the soundness of the financial system, while supporting innovation and competition. The letter’s focus is on the risks that may arise in light of the parallel availability of deposits, e-money and (in due course, regulated) stablecoins to retail customers. The PRA notes that these can appear similar to customers, but each come with differing forms of legal protection, and that it wishes to avoid customer confusion. Amongst the PRA’s expectations for deposit-taking firms are that they will issue digital money only as deposits, and not as e-money or using other product structures.

Read the full consultation here.

Cross-authority roadmap on innovation in payments

Together, the Bank of England, PRA and FCA have set out their approach to regulating payments, money and money-like instruments. The publication addresses e-money, stablecoins and tokenised deposits individually, and sets out the regulators’ next steps for industry engagement and the development of rules. Crucially, the roadmap estimates that rules for the regulation of stablecoins will be finalised in H2 2024.

Read the full roadmap here.

If you have any questions on these publications, please reach out to your usual A&O contact.