The United Kingdom Treasury published an update of its plans for stablecoin regulation yesterday. The proposed legislation will bring certain stablecoins within the regulatory remit of the Financial Conduct Authority (FCA), Bank of England, and Payment Systems Regulator (PSR).
The aim of the proposals is two-fold: to regulate stablecoins for use in payment chains, and to regulate the custody and issuance of stablecoins regardless of use (e.g. payments, store of value, settlement asset). Clear regulation will bring numerous benefits to the U.K. according to the Treasury:
“Having a regulatory framework in place will stimulate growth and innovation in the sector by giving responsible actors regulatory certainty whilst mitigating financial stability risks and ensuring consumer protection.”
Only fiat-pegged stablecoins that are partly or wholly backed by fiat reserves and are issued in or from the U.K. are covered by the proposals, although this is not limited in terms of ‘peg’ currency, and also includes stablecoins pegged to a ‘basket’ of multiple fiat currencies.
It does not include algorithmic stablecoins or tokens pegged to commodities other than fiat currency. These will not be prohibited from use but will remain unregulated for use in payment chains. Instead they will fall under the category of unbacked cryptocurrency, which will be legislated for in phase two at a later date.
The Treasury does want to accommodate fiat-backed stablecoins issued outside of the U.K. into regulated payment chains, and is currently looking into an approach whereby the payment facilitator is FCA-approved and has the responsibility to ensure that the ‘overseas’ stablecoins meet the correct standards.
The FCA will be the chief regulatory body for stablecoins, although if payment systems are deemed to be systemic then the Bank of England may take charge to ensure that systems and participants (including issuers custodians and exchanges), “demonstrate end-to-end financial and operational resilience.”
The PSR may also get involved on a co-supervisory basis to regulate on competition, innovation and access.
Regulations will include: backing assets requirements for issuance (including the possibility that these must be held in a statutory trust), payment regulations for both pure stablecoin and mixed stablecoin/fiat transactions, and custody rules based on modified TradFi regulation. The custody regulations will be expanded to a wider range of assets in phase two when other token types become regulated.
The next stage of the process is to bring secondary legislation before the U.K. parliament as soon as possible, with the intention for this to happen by early 2024.