UK’s Planned Stablecoin Rules Need Reworking, Crypto Advocates Say

• The Bank of England and the Financial Conduct Authority need to reconsider certain proposals to regulate stablecoins, multiple industry groups say.
• Lobbying groups argue the proposals treat stablecoin issuers unfairly and harm their ability to earn revenue.

Crypto industry groups in the U.K. say local regulators’ proposals for supervising stablecoins need reworking.

In November, the Bank of England (BoE) and Financial Conduct Authority (FCA) published discussion papers on their plans for regulating crypto pegged to the value of fiat currencies or other steady assets. The industry’s responses to the consultation reveal crypto advocates have mixed feelings about the proposals, saying that there are some good points, but a number of aspects need to be reconsidered.

Both regulators plan on supervising stablecoins. The FCA will regulate the issuance and custody of fiat-referenced stablecoins as well as the use of these as a means of payment. The BoE will oversee systemic payment systems involving stablecoins, which refers to stablecoins that are circulated widely enough to affect financial stability should their issuers go bankrupt.

Misaligned

Crypto advocates are concerned that the two regulators may not be aligned on their treatment of stablecoin firms, particularly with regard to issuers’ ability to earn interest on reserve assets that back the tokens in circulation.

The FCA has acknowledged in its discussion paper that stablecoin issuers earn most of their revenue by investing reserve assets and earning interest.

“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,” the FCA said in its proposals.

The BoE, by contrast, suggests issuers of systemic stablecoins should hold backing assets in central bank reserves, which would restrict their ability to earn interest.

"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,'" said Paul Worthington, head of regulatory affairs at Innovate Finance.

If a stablecoin firm that was previously under the purview of the FCA grows to become systemic, then the issuer is faced with an entirely new regime, Worthington said.

"Suddenly, you can't earn revenues from the assets; you can't earn interest. So you have to totally pivot your entire business model," Worthington said."But that's not a model for growth."

Su Carpenter, director of operations at Crypto UK, also said that the lobbying group supports having the benefit of interest and that the differing approach between the FCA and BoE would be "problematic in the future."

Reserves

Industry advocates are also concerned by both regulators’ proposals on what assets should back the stablecoins.

The FCA's proposal suggested limiting acceptable assets to government treasury debt instruments with maturities of one year or less and short-term cash deposits.

"Our members feel that limiting the acceptable backing assets will be an impediment to issuers wanting to run a stablecoin in the U.K.," advocacy group The Payments Association said in its response to the consultation. "Making returns on the funds backing a stablecoin is one of the key revenue drivers for potential issuers and so more flexibility is needed."

CryptoUK, in its response, echoed the drive for more options.

“A higher degree of flexibility in backing assets will increase diversification and reduce the risks facing issuers, and by extension, the risks that consumers face by investing into this sector,” the group said, comparing U.K.’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.

Another industry group, UK Finance, also noted it wants fiat-referenced stablecoins to have as much flexibility as e-money, which generally allows for "secure and liquid" assets – including money market funds or longer-term government debt – to make up reserves.

"As e-money appears to create a similar risk to stablecoins, it is difficult to understand why a similar risk would not be regulated in a similar way," UK Finance said in its response.

Meanwhile, the BoE's approach is for backing assets to be restricted to central bank deposits only. The Digital Pound Foundation said this approach would also be "extremely limiting."

Compensation

The FCA also proposed not including stablecoin providers under its Financial Services Compensation Scheme. FSCS allows the FCA to compensate customers up to £85,000 ($107,300) when a company that has gone bust is unable to pay customers what they are owed.

"In all honesty, we don't agree with that, and if stablecoins are going to fall within the regulated perimeter, then if – for example – fraud is taking place, then why shouldn't it be covered by the FSCS?" Carpenter said.

On the other hand, The Payments Association contended that issue may need further review.

"It is difficult to apply FSCS at this nascent stage of the crypto asset market, as it is unclear what the size of the market will be and how many issuers will seek authorization in the U.K.," the organization said. "It is therefore impossible to calculate levies and conduct a cost-benefit analysis."

The FCA will now review responses to its proposals and draft a handbook of rules for consultation.