By Angus Irvine, Principal Consultant
We’ve been discussing the importance of stablecoins and how Phase 1 of cryptoasset regulation in the UK might affect issuers and custodians. But what does the regulation mean for the future of the industry?
In this article, we cover the regulatory amendments to Payment Services Regulations (PSRs), and Electronic Money Regulations (EMRs) in the DP23/4 discussion paper, and ask: is this a small step or a leap forward for cryptoassets in the UK?
Amendments to the PSRs and the EMRs
In addition to the Financial Services and Markets Act (FSMA), the Treasury also intends to amend the current regulatory framework for payment and e-money services to allow fiat-backed stablecoins to be used as a means of payment in the UK.
- DP23/4 sets out the division between activities brought into the regulatory perimeter under the Regulated Activities Order (RAO) and how fiat-backed stablecoins may be offered by authorised payment and e-money institutions, such as wallet holders.
- At a high-level, the suggested amendments provide for two regulated services:
- Where a regulated stablecoin is used at the entrance or exit of an existing fiat payment chain, but where the actual transfer of value would be in fiat by way of a traditional payment service (the ‘hybrid model’), and
- Where both a payer and payee transact in stablecoin, and the transfer of stablecoins between them occurs ‘on-chain’ (the ‘pure stablecoin model’)
The Treasury is exploring whether firms that offer one or both models may need new permissions under the PSRs as “payment arrangers”.
The UK Government is also considering regulating the use of overseas stablecoins within UK payment chains. One approach would be to give the Financial Conduct Authority (FCA) powers under the PSRs to require payment arrangers to assess overseas stablecoins against FCA standards.
Under this approach, authorised or registered payment arrangers regulated under the PSRs will bear the burden to determine whether overseas stablecoins meet the standards set out by the FCA to be distributed in the UK. This will include the appointment of an auditor to verify certain aspects of the assessment. Crucially however, the FCA doesn’t expect redress to come from a Payment Arranger if an overseas stablecoin destabilises.
Overseas stablecoins that are deemed to meet the FCA standards would potentially receive an ‘Approved Stablecoin’ label. The evaluating payment arrangers will need to report the number of transactions made on the Approved Stablecoins to the FCA and the Bank of England.
Is this a small step or a leap forward?
At the moment, most issuers of fiat-backed stablecoins restrict redemption to wholesale users such as exchanges – either directly, or indirectly, where restrictions (such as high fees or minimum withdrawal amounts) function as a deterrent to such use. This leaves retail consumers with the sole ability to trade their stablecoins in the secondary market, should they wish to exchange their stablecoins for fiat. The new proposed regulation appears to offer little in the way of change in this instance.
To carry out either issuance or custodian services in relation to stablecoins, firms currently authorised under the Act will need to submit a Variation of Permission (VoP) to undertake these new regulated activities.
The FCA aims to ensure that regulated stablecoins preserve a stable value by requiring the stablecoin issuer to constitute and maintain, on an ongoing basis and at all times, a reserve of backing assets equivalent in value to the circulating supply of the regulated stablecoin. This would also enable them to achieve prompt redemption of the regulated stablecoin on demand, in turn helping to maintain market, user and investor confidence in the product.
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