In a significant development in the world of digital finance, the Financial Conduct Authority (FCA) and the Bank of England have unveiled their proposed regulatory approach for stablecoins. These proposals aim to strike a balance between fostering innovation and ensuring robust consumer protection within the fast-evolving stablecoin ecosystem. Stablecoins, as a new type of digital asset, are designed to maintain a stable value and have the potential to revolutionize retail payments.
The FCA’s Discussion Paper focuses on the regulation of the issuance and management of stablecoins, with a specific emphasis on those that claim to maintain a stable value relative to a fiat currency by holding assets denominated in that currency.
Meanwhile, the Bank of England’s Discussion Paper outlines the framework for regulating operators of systemic payment systems utilizing stablecoins. These are payment systems that, if widely adopted for retail payments in the UK, could potentially pose risks to financial stability. The Bank also seeks to oversee other entities providing services to these payment systems, including stablecoin issuers and wallet providers, especially when such services carry the potential for financial stability risks.
Sheldon Mills, Executive Director, Consumers and Competition at the FCA, expressed the potential benefits of stablecoins in terms of expediting and reducing the cost of payments for consumers and businesses. He emphasized the importance of gathering input from various stakeholders to establish balanced and consumer-centric rules that also align with regulatory objectives. The FCA is committed to collaborating with the government, industry partners, and the broader crypto sector to shape the UK’s crypto regulation framework.
Sarah Breeden, Deputy Governor for Financial Stability at the Bank of England, stressed the need for robust and transparent regulation as stablecoins have the potential to enhance digital retail payments in the UK. These proposals aim to facilitate secure innovation while ensuring that firms understand and manage risks effectively, offering the public confidence in the safety and reliability of digital money and payments.
The FCA and the Bank of England invite feedback from the public and industry until February 6, 2024.
In parallel, the Prudential Regulatory Authority (PRA) has released a Dear CEO letter outlining its expectations for deposit-takers in addressing the risks associated with issuing various forms of digital money. The PRA also highlights the potential benefits of innovation in this space, emphasizing that banks should consider operational resilience, anti-money laundering, counter-terrorist financing, and liquidity and funding risks in their adoption of digital money for both retail and wholesale purposes.
Additionally, a cross-authority roadmap paper on innovation in payments and money has been published to elucidate how the regulatory regimes for different forms of digital money will interact under UK authorities’ current and proposed oversight.
The FCA continues to caution individuals regarding the high-risk nature of cryptoassets, including stablecoins, which remain largely unregulated and offer limited protections in case of adverse events.
This initiative to regulate stablecoins represents the first phase of the UK government’s comprehensive cryptoasset regulatory regime. As outlined in HM Treasury’s recent update on plans for the regulation of fiat-backed stablecoins, the FCA will be granted powers to formulate rules pertaining to the issuance and custody of fiat-backed stablecoins within the UK.
In an ever-evolving financial landscape, these proposed regulations mark a crucial step toward fostering innovation while safeguarding the interests of consumers and maintaining financial stability. It signifies the UK’s commitment to actively shape the future of digital finance.
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