On 6 November 2023, the Bank of England (BOE) and the UK's Financial Conduct Authority (FCA) published discussion papers on their respective plans to regulate stablecoins - a type of crypto asset which purports to maintain a stable value relative to one or more assets or currencies. The proposals form part of wider UK reforms to regulate crypto assets. However, the regulators' different approaches have sparked heated debate within the UK crypto asset industry over the proposed regime.
While both regulators plan to supervise stablecoins, they have different regulatory focuses:
the FCA's Discussion Paper DP23/4 says its main focus is to regulate the issuance and custody of fiat-backed stablecoins in or from the UK, as well as their use as a means of payment for goods and services in the UK. In addition, the FCA is exploring how to regulate the use of overseas stablecoins in UK payment chains; and
on the other hand, the BOE said in its discussion paper that it will oversee systemic payment systems involving stablecoins, i.e. those that become widely used as money for everyday payments in the UK economy. This may include stablecoins that are circulated widely enough to disrupt financial stability should their issuers become insolvent.
Some crypto advocates are concerned about a lack of alignment between the proposals, particularly with regard to issuers’ ability to earn interest on reserve assets that back the stablecoins in circulation.
Specifically, the FCA acknowledges in its discussion paper that stablecoin issuers earn most of their revenue by investing reserve assets and earning interest, and it proposes to allow these activities:
We propose that, under our regime, regulated stablecoin issuers can continue to retain, for their own benefit, the revenue derived from interest and returns from the backing assets
By contrast, the BOE suggests that issuers of systemic stablecoins should hold backing assets in central bank reserves, therefore limiting their ability to earn interest on the assets.
This misalignment could mean if a stablecoin firm grows to become systemic it may have to vary its business model under the BOE proposal or limit its further growth.
Paul Worthington, head of regulatory affairs at Innovate Finance says (as quoted by Coindesk):
The FCA is working with the way of the market and the way the market is developing, whereas the Bank of England is actually saying, "No, you need to come up with an entirely new business model".
The FCA's proposal also suggested limiting acceptable backing assets to government treasury debt instruments with maturities of one year or less and short-term cash deposits. Some industry advocates are concerned this proposal would also limit asset diversification and unduly undercut issuer's revenue model.
They compare the UK’s proposal to Singapore’s reserve requirements, which say stablecoins can be backed by “highly liquid and low-risk assets,” including cash and cash equivalents. Some industry groups say they want to include secure and liquid assets like money market funds or longer-term government debt to make up reserves.
Despite this controversy, the UK is making significant steps toward establishing a regulatory framework for stablecoins, which are an important part of the crypto asset ecosystem. The FCA and the BOE aim to consult on final rules by mid-2024, and implement the stablecoin regimes by 2025.
Australia has also recently consulted on regulating payment stablecoins, which forms part of a broader reform proposal intended to modernise Australia's payment system. Piper Alderman made a submission to the consultation, which can be found here.
By Jake Huang and Steven Pettigrove