The Bank of England (BOE) and the Financial Conduct Authority (FCA) are taking steps to regulate different segments of the cryptocurrency landscape in the United Kingdom. Specifically, the BOE is honing in on “systemic stablecoins,” which refer to digital currencies extensively circulated to the extent of potentially disrupting the country’s financial stability. Meanwhile, the FCA will oversee the broader cryptocurrency domain.
United Kingdom makes regulatory decisions
This regulatory initiative has been instigated by the emergence of proposals from major tech giants like Meta (previously Facebook) and PayPal to issue stablecoins. Additionally, the collapse of Terraform Labs, a stablecoin empire, last year, has intensified the need for regulatory frameworks globally, prompting closer scrutiny and regulations in various jurisdictions, such as the European Union and Japan. The European Union’s Markets in Crypto Assets (MiCA) regulation, for example, is designed to restrict the scope of widely used stablecoins, particularly those proposed by entities like Meta.
Conversely, the proposed regulations in the United Kingdom by the BOE appear to be more accommodating, allowing companies to issue payment-oriented, fiat-backed stablecoins provided they meet regulatory standards. Presently, none of the existing stablecoins qualify as “systemic” under the proposed regulations. The United Kingdom government has made clear its ambition to establish itself as a major cryptocurrency hub. In June, the government brought stablecoins under the country’s payment regulations, and additional legislation focusing on fiat-backed stablecoins is anticipated in the upcoming year.
The papers published by the regulators mark the initial phase in the establishment of this new regulatory framework. These papers will be reviewed based on feedback from stakeholders before the final rules are proposed. The BOE and FCA plan to discuss and finalize the rules by mid-2024 and implement the stablecoin regulations by 2025, according to a document accompanying the discussion papers. The BOE’s primary interest lies in stablecoins pegged to the value of the British pound, considering their potential widespread use in various payment scenarios.
FCA’s oversight and regulatory proposals
The institution is contemplating measures that might include potential limits on individual holdings of stablecoins. The BOE’s publication coincided with a letter from the Prudential Regulation Authority (PRA) directed to deposit-takers. The PRA stressed the importance for lenders to mitigate the risks associated with “contagion.” The letter clarified the distinct protections available to traditional deposit takers compared to those available for users of stablecoins.
The PRA also emphasized that contagion risks would be lower for stablecoins used within systemic payment systems regulated by the Bank compared to e-money or other regulated stablecoins under the FCA’s purview. Meanwhile, the FCA proposed that issuers seeking to circulate fiat-backed stablecoins in or from the United Kingdom would require authorization. The watchdog wants stablecoins to be backed by “appropriate” assets matching the circulating value.
Additionally, they urge issuers to ensure ease of redemption for these cryptocurrencies into fiat currencies, irrespective of technical or liquidity challenges. The FCA also suggested that regulated stablecoin issuers be allowed to retain revenues derived from interest and returns from the assets backing the stablecoins. This is intended to distinguish stablecoins from traditional deposits.
However, the FCA proposed that regulated stablecoin issuers should not pay income or interest to consumers, which might be perceived as unfair during periods of high or significantly increasing interest rates, given the protection of the stablecoin backing assets as client assets. The crux of these regulatory proposals in the United Kingdom is to strike a balance between fostering innovation in the cryptocurrency sector while safeguarding financial stability and protecting consumers from potential risks associated with these digital currencies.
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