FCA seeks feedback on the approach to regulating stablecoins

 

The Financial Conduct Authority (FCA) proposed regulatory framework for fiat-backed stablecoins in the UK, as outlined in the discussion paper (DP23/4), will have several implications for financial institutions in the country, the Bank of England (BoE) outlines their regulatory approach to operators of systemic payment systems using stablecoins under their discussion paper.

If your firm requires support or wishes to discuss further in relation to the information provided Objectivus will be able to offer any additional support needed. Please get in touch with Simon Bird srb@objectivus.com or Nicholas Dun njd@objectivus.com

The UK is establishing a dual regulatory framework for fiat-backed stablecoins, spearheaded by the FCA and the Bank of England. This framework mandates financial institutions to obtain necessary authorisations, align with payment and AML/CTF regulations, and foster market integrity and consumer protection. The Bank of England’s focus is on ensuring that stablecoins used in systemic payment systems are safe, stable, and backed by adequate assets to maintain financial stability. Both regulatory bodies emphasise the need for innovation within a secure and competitive market, with a keen eye on international regulatory standards. This integrated approach aims to position the UK at the forefront of digital asset utilisation while maintaining robust financial stability and consumer trust.

The FCA Framework

Compliance Requirements: Financial institutions dealing with stablecoins must secure authorisation from the FCA and comply with the Financial Services and Markets Act 2000, as well as adhere to the FCA Handbook.

Operational Alignment: These institutions are required to adjust their operations to meet the standards set by the Payment Services Regulations 2017, with a particular focus on custody and payment services.

AML/CTF Supervision: Robust anti-money laundering and counter-terrorist financing controls must be in place to satisfy the FCA’s registration and supervisory requirements.

Market Dynamics: The new regulations will shape how financial institutions engage with the cryptoasset market, potentially leading to innovative stablecoin-related products and services.

Consumer Protection: There is a strong emphasis on protecting consumers and ensuring the integrity of the market, in line with the FCA’s strategic objectives.

Innovation Incentive: The regulatory regime is designed to encourage innovation and competition, prompting institutions to develop new offerings and improve operational processes.

Global Standards: Institutions must also consider international regulatory standards and efforts, reflecting the FCA’s involvement in global regulatory development.

The BoE Approach

Regulatory Framework: The Bank of England proposes a regulatory framework specifically for systemic payment systems that utilise stablecoins, complementing the FCA’s discussions.

Money Confidence: The Bank distinguishes between ‘outside money’ and ‘inside money’, with stablecoins falling into the latter category and subject to the Bank’s regulations.

Digital Asset Evolution: Acknowledging the decline in cash and the rise of digital assets, the Bank emphasises the need for stablecoins to be safe and regulated to offer their full benefits.

Stability and Innovation: The framework aims to balance the promotion of innovation with the safeguarding of financial stability, recognising the transformative potential of stablecoins in payment systems.

Systemic Regulation: The Bank’s focus is on firms operating payments at a systemic scale, addressing the financial stability risks associated with such operations.

Value Stability: It is crucial for stablecoins to maintain a stable value by being backed by a pool of assets, ensuring their reliability as a means of payment.

Legislative Support: The UK Government has provided legislative support for the Bank to regulate systemic stablecoin payment systems, ensuring their safe use.

If you require support or advice with any of the points mentioned above or think your firm may benefit from a review of your financial promotions, please contact Simon Bird or Nicholas Dunn.