Building off the back of the Financial Conduct Authority‘s (FCA) recent crypto marketing regulations, the UK regulator is now working with the Bank of England to address another area of the digital assets world: stablecoins. We reached out to the industry to hear its views on the latest proposed legislations.
In early November 2023, both the Bank of England and the FCA published discussion papers focusing on stablecoin regulation in the UK. The end goal of both papers is to uncover the value of stablecoins in the UK’s economy and how they can be utilised to make payments faster and cheaper.
The FCA’s paper explores the proposed regulations and how stablecoins claim to maintain a stable value relative to a fiat currency by holding assets denominated in that currency. Meanwhile, the Bank of England’s paper outlined how payment systems and other entities providing payments services using stablecoins would be regulated.
Discussing the benefits of stablecoins on an economy, Nathan Catania, partner at XReg Consulting, the crypto regulation consultancy, said: “A significant benefit of stablecoins is that, like other cryptoassets, they enable the cross-border transfer of value in a faster, more cost-effective way than via intermediaries in the traditional financial system while at the same time ensuring price stability, unlike other more volatile cryptoassets.
“In my view, the main benefit of stablecoins is their ability to interact with and be used by smart contracts in DeFi applications, thus allowing such applications to access and utilise stable assets.”
Breaking down the paper
Stablecoins are often associated with USD due to the most well-known crypto stablecoins being pegged to it. However, the Bank of England’s discussion paper focuses on sterling-denominated stablecoins. This is due to them being the most likely digital settlement assets to be used for payments. As a result, the paper breaks its analysis into two parts.
The first part focuses on the Bank’s role in ensuring the safety of money and payments. Meanwhile, the second part explains the proposed requirements for the regime.
In said second part, the bank discusses transfer functions and how stablecoins can be issued in a systemic payments system. Furthermore, it analyses requirements for wallet providers and other service providers too; in addition to requirements on backing assets and restrictions on remuneration for the issuance of stablecoins used in systemic payment systems.
A long way off final regulations
As a result of the papers, both the FCA and Bank of England have welcomed a discussion following their proposed rules. While it is a good first step into regulation the digital asset, there is still a long way to go before final regulations are brought into play remarks Adam Berker, senior legal counsel at Mercuryo, the crypto-focused paytech.
“It should be noted that this document only marks a preliminary and surface-level look at how this area will be regulated in the future. The paper even mentions directly that the FCA and the HM Treasury will have to develop their own rules, outlining their areas of responsibility. In other words, we are still far away from seeing what the final regulations will look like. For now, the main areas of work have simply been highlighted, alongside the main parties responsible for their development.”
Concerns around a sterling peg
Berker continues: “It is also good that they extended this regulation to the international arena. I think that many companies that issue stablecoins will be going to the UK in the future to obtain registration so that they may operate and interact with partners in a fully legal capacity. This would be quite a boost for their interactions with traditional finance players.
“At the same time, though, it is unclear what exactly will be regulated. Only stablecoins pegged to the pound sterling, or will it extend to other currencies, as well? Because, as far as I am aware, stablecoins tied to the US dollar still hold the majority of this market. Ideally, regulations would have to cover stablecoins pegged to a variety of different fiat currencies.”
Sharing similar concerns about pegging stablecoins to the pound sterling, Jeremy Cheah, associate professor of decentralised finance at Nottingham Business School, said: “When it comes to the benefits, the value is more stable compared to other cryptocurrencies because it is pegged to the underlying asset – usually USD. However, if the pegging mechanism does not work, the peg breaks down.
“Ensuring the pegging mechanism works must be a focus for FCA and Bank of England, as well as ensuring what these companies do with their underlying asset. There needs to be full disclosure and transparency on this, and it needs to be now, as stablecoins are being used for speculative purposes.”
Ultimately the right move?
Regulations and the world of crypto have historically butted heads. The very nature of cryptocurrencies makes them incredibly hard to regulate, and for many the lack of clear-cut regulations is what makes them so attractive. However, as regulators start to come down on crypto firms, many are feeling the heat and, as a result, could consider moving the headquarters to a more lenient region.
This was a concern earlier in the year when Coinbase, a global crypto exchange, clashed with the Securities and Exchange Commission (SEC) in the US. There were suggestions that the acquisition of a licence in Bermuda could see the crypto firm move its HQ out of the US due to the emergence of strict regulations.
Every country wants to be a hub for innovation, however, Igor Mandrigin, co-founder and CTO of Gateway.FM, the decentralised blockchain infranode provider, expresses his concerns about the papers saying: “The announcement gives expression to the hard line that the FCA is taking when it comes to crypto regulation. Strict regulations might drive stablecoin projects offshore, undermining the UK’s ability to establish a dominant position as a crypto hub.”
Discussing the extent the papers have initially covered regulations, Nick Philpott, chief operating officer at Zodia Markets, the digital assets exchange said: “We continue to study the papers, but our initial review suggests they may not be aware of some nascent developments in the stablecoin market. First is that stablecoins allow clients in offshore countries to hold foreign currencies onshore.
“For example, someone in Egypt could hold a GBP stablecoin in a wallet, phone, laptop, local custodian, or exchange. This is significantly easier than opening a GBP bank account with a local Egyptian bank or opening an offshore bank account as an Egyptian national. As a result, there is the possibility that stable and desirable fiat currencies could be used outside their home countries significantly more. In other words, the use of a country’s currency can spread wherever the open internet is also available.
“Second is the ability to use stablecoins in different currencies to manage foreign exchange risk. This would advance the BIS’s objective of fostering more efficient cross-border payments by seeing multiple currencies potentially all on the same chain. This would allow greater interoperability between currencies and cross-border harmonisation. Were this to be done bilaterally between the 180 or so currencies in the world, then there would be somewhere in the region of 16,000 different bilateral channels to network them all fully.
“Finally is the prospect for interoperability with other assets that stablecoins offer. If you have a bill of lading and the means of payment used to buy it on the same settlement infrastructure, then the opportunities for efficiencies and improvements are profound.”