The UK is attempting to outline their regulatory strategies for the broader crypto industry with a specific focus on stablecoins. This could serve as an intriguing model for the global community.
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The Bank of England (BoE) and the Financial Conduct Authority (FCA) published discussion papers that outline their regulatory strategies for the broader crypto industry, with a specific focus on stablecoins. The BoE is concentrating on regulating “systemic stablecoins” that have the potential to disrupt financial stability, while the FCA is responsible for overseeing the entire crypto sector.
The United Kingdom (UK) is not alone in its efforts to regulate this space; many countries worldwide are actively working to establish appropriate frameworks. Multilateral organisations are also deeply involved in this endeavour. Finding the right framework, if there is one, is of paramount importance for numerous compelling reasons.
The crux of the matter
The discussion papers proposenvolve
These proposals represent the UK's ongoing efforts to position itself as a hub for digital assets, given concerns about London's financial dominance in Europe post-Brexit. Recently, the Treasury responded to a consultation on crypto regulation, indicating that stablecoins would be regulated under existing rules for traditional payment service providers.
From consultation to legislation
In January 2021, His Majesty’s Treasury initiated a consultation regarding the regulatory approach to cryptoassets and stablecoins in the UK, along with a call for evidence on distributed ledger technology in financial markets. The official response to the consultation was made public in April 2022, affirming the government's intention to introduce a legislation incorporating specific activities related to stablecoins within the regulatory framework for financial services.
The government has maintained that crypto-assets and the associated activities supporting their use should adhere to standards in line with existing financial service activities, in proportion to the risks involved, while leveraging the potential advantages of the underlying technologies. Establishing a regulatory framework is expected to foster growth and innovation in the sector by offering responsible participants regulatory clarity, while also addressing financial stability concerns and safeguarding consumer interests. Thus, it is appropriate for HM Treasury to establish a regulatory framework for fiat-backed stablecoins, including their use as a payment method.
The Imperative of oversight
The introduction of stablecoins, particularly by technology giants, along with the controversy surrounding Tether, has prompted global regulatory responses. Moreover, the collapse of FTX hasn’t done the cryptocurrency ecosystem any favours. Therefore, the BoE, along with central banks around the world, are focusing on effective regulation.
The BoE intends to enable companies to issue fiat-backed stablecoins focused on payments in the United Kingdom (UK), subject to specific criteria. The UK, aspiring to become a global crypto hub, has already integrated stablecoins into its payment regulations since June. Regulators plan to consult with stakeholders and aim to establish definitive rules by mid-2024, with the intention of implementing stablecoin regulations by 2025. The BoE's primary attention is on stablecoins pegged to the British pound, given their anticipated widespread use for payments. They are contemplating the imposition of potential limits on individual stablecoin holdings.
The BoE's paper is accompanied by a letter from the Prudential Regulation Authority (PRA) to deposit-takers, underscoring the need to mitigate risks associated with stablecoins. The PRA distinguishes between the protections available for traditional deposit takers and those for stablecoin users, suggesting that contagion risks are lower for stablecoins utilised in systemic payment systems regulated by the BoE.
The FCA mandates that issuers seek authorisation for the circulation of fiat-backed stablecoins in or from the UK. These stablecoins must have appropriate assets backing their circulating value, and issuers must ensure their easy conversion into fiat currencies, irrespective of technical or liquidity challenges. The FCA also suggests that regulated stablecoin issuers should be allowed to retain earnings from the assets backing the stablecoin, thus emphasising a clear distinction between stablecoins and traditional deposits. Additionally, the FCA advises against regulated stablecoin issuers paying income or interest to consumers, a decision made with consideration for consumer fairness, particularly in a high-interest rate environment where backing assets are anticipated to be safeguarded as client assets.
The UK government is in the process of formulating cryptocurrency regulations. With the introduction of the Financial Services and Markets Act 2023 (FSMA 2023), HM Treasury gains the authority to regulate fiat-backed stablecoins. In the upcoming phase, HM Treasury will enact secondary legislation, granting the FCA the power to oversee fiat-backed stablecoins. Furthermore, it entrusts control over systemic digital payment systems to both the BoE and the Payment Systems Regulator.
Is there a blueprint?
Central banks and global organisations are cooperating to create global regulations and standards for the cryptocurrency industry, driven by recent high-profile disruptions. While they have found common ground on several fronts, substantial progress is being made within the G20, especially concerning the regulation of stablecoins. The G20 has introduced a comprehensive synthesis paper, a collaborative effort by the International Monetary Fund (IMF) and the Financial Stability Board (FSB), aimed at defining a minimum standard that jurisdictions should adhere to, addressing shared concerns present in most jurisdictions.
The UK and India are distinct countries, each characterised by their unique macroeconomic conditions and needs. As a result, the discussions and apprehensions surrounding stablecoins may also differ. Emerging economies express concern about stablecoins due to their potential impact on monetary policy effectiveness if widely adopted.
The effectiveness of monetary policies, which are measures used by central banks to manage the money supply and stimulate economic growth, could be compromised if dollar-denominated stablecoins, for instance, were to circulate in small emerging markets. This could lead to volatility in capital flows and undermine their monetary policy. In such scenarios, it could also affect tax collection and government revenue in emerging economies.
The UK's fresh regulations could serve as an intriguing model for the global community. It's clear that a one-size-fits-all regulatory approach won't suit every country's unique circumstances. Nonetheless, by establishing general principles and guidelines, central banks can offer insights for the world. This process begins with central banks understanding and addressing their nation's distinct challenges, which, in turn, could provide valuable lessons for the international community.
Sauradeep Bag is an Associate Fellow at the Observer Research Foundation
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.
Sauradeep Bag is Associate Fellow at ORF. Sauradeep has worked in several roles in the startup ecosystem and in international development with the United Nations Capital ...
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