BoE and FCA publish proposals for UK stablecoin payment regime

Stablecoins are a form of digital assets that purport to maintain a stable value relative to a fiat currency by holding assets, which may be of variable value, as backing. Stablecoins as they operate today are mainly used as the asset to settle transactions in the crypto world, and do not meet the expected standards were they to be used for payments more widely. However, they could conceivably by used by UK retail consumers for everyday payments, as they purport to have a stable value and may offer advantages in terms of cost, convenience and functionality.

Recent discussion papers published by the BoE and the FCA request feedback on their proposed approach to regulating stablecoins as a widespread and safe means of payment in the economy, including for consumer retail payments. The BoE is also expected to imminently publish a response to its February 2023 consultation on a ‘digital pound’.

Regulating stablecoins is the first phase in the UK government’s plans to introduce a comprehensive cryptoasset regulatory regime. The Treasury plans to give the FCA powers to make rules about the issuance and custody of fiat-backed stablecoins in the UK under the Regulated Activities Order (RAO) in early 2024.  

The BoE discussion paper sets out how it would regulate operators of systemic payment systems using stablecoins – payments systems which, if widely used for retail payments in the UK, could otherwise pose risks to financial stability. It would also regulate other entities providing services to these payment systems, such as stablecoin issuers and wallet providers, where they could otherwise pose financial stability risks. According to the BoE, the proposed regulatory framework is one within which “this type of innovation can flourish in a sustainable way” and which “will ensure that the stability of the financial system is safeguarded and the provision of payments services upon which people depend is safe and reliable”.

The FCA’s discussion paper (110-page / 1.47MB PDF) explores the proposed regulation around issuing and holding fiat-backed stablecoins that claim to maintain a stable value relative to a fiat currency by holding assets denominated in that currency.

Financial regulation expert Hannah Ross of Pinsent Masons said the discussion paper “should help stablecoin issuers and custodians start thinking about what they will need to do in the future to become authorised, and the rules they will have to comply with once they do.”

However, she added: “The FCA is envisaging applying the majority of its high level and specific rules to fiat-backed stablecoins, but there is a lot of detail to be ironed out before specific rule amendments are proposed, such as how a separate pathway for fiat-backed stablecoins issued outside the UK will be regulated”.

She said regulating fiat-backed stablecoin issuers and custodians will “hopefully reduce the risk of serious consumer harm through the use of this new currency, and open it up to a wider consumer audience”, but the FCA is not proposing that Financial Services Compensation Scheme (FSCS) cover will be available for these new regulatory acts.

“There is a policy decision here not to compensate consumers where they have chosen to engage in higher risk services or products. However, the FCA could be opening itself up to future criticism if it does not revisit this quickly as and when the market develops,” she explained. 

Despite the proposals being received as a positive regulatory development, Ross predicted that it could take a while before stablecoins become a widely accepted form of consumer payment. She said: “The discussion paper envisages fiat-backed stablecoins becoming a parallel means of payment for retail customers, creating a faster, less expensive and more secure payment system. But with consumers content with the relative speed and remittance of more traditional payment methods, together with the complexity of cryptocurrency, it may take some time before fiat-backed stablecoins can become a widespread form of consumer payment. Even then, vulnerable, technologically unsavvy or digitally excluded consumers will be unable to easily use fiat-backed stablecoins as a means of payment in the UK.” 

The UK’s proposed regulatory framework around stablecoins will not only create a new wave of disruption in the UK payments, it is also set to have an important international impact, said payment services expert Andrew Barber of Pinsent Masons. 

“With a well-established and competitive payments landscape in the UK, the UK’s proposals around the regulation of stablecoins may in fact have a greater impact on cross-border payments where speed of settlement still remains a significant issue. However, for stablecoins to have a true impact on cross-border payments we will need international agreement on the approach to their regulation. The UK’s proposals give it first mover advantage and the opportunity to drive the regulatory agenda for this developing form of payment,” he said.  

The deadline for responses to both the BoE’s and the FCA’s discussion papers is 6 February 2024.