Stablecoin Regulation: UK Sets Stage

Stablecoin Regulation
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In a concerted effort to become a prime location for investment and enhance user protection, the UK has unveiled a comprehensive plan for the regulation of stablecoins and broader financial services. On October 30, the Treasury revealed detailed proposals for the oversight of ‘fiat-backed stablecoins’, in the wake of increased market scrutiny and global calls for standardized regulations.

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Embracing Global Regulatory Trends

There has been significant international pressure for the UK to articulate its position on stablecoins and to integrate these digital assets into the mainstream financial system, particularly to facilitate more efficient cross-border transactions.

Under the new framework, the Bank of England, the Financial Conduct Authority, and the Payment Systems Regulator will jointly oversee the incorporation of fiat-backed stablecoins into the financial ecosystem, aiming to mitigate financial instability and prevent regulatory discrepancies.

The guidelines detail that stablecoins will be subjected to stringent regulatory procedures. These range from the composition of the assets backing them to the regulation of their issuance and custodial processes.

Enhanced Payment System Regulations

Stablecoin usage within payment systems will fall under the regulatory scope of the existing Payment Service Regulation (2017), providing a standardized approach for financial entities engaging in these services.

Issuance Oversight by the FCA

With regard to the release of new stablecoin assets, the FCA will establish and enforce regulations under the Financial Services and Markets Act, necessitating firms to comply with FCA rules and guidance for authorization.

The Treasury aims to align foreign stablecoin operators with domestic regulatory standards, explicitly prohibiting the use of non-fiat-backed stablecoins in regulated payment systems, without imposing an outright ban.

Reserve and Insolvency Safeguards

Issuers will be mandated by the FCA to maintain reserves of assets in accordance with the Commission’s rules, and provisions will be made for the application of the Insolvency Act 1986 in case of financial failure.

Anticipating Broader Cryptocurrency Regulations

With the UK’s vision to establish itself as a global crypto hub in 2022, the Treasury Minister Andrew Griffith acknowledged the proposals as a significant forward stride. The recent response to the consultation paper has addressed public concerns about a digital pound and the call for comprehensive stablecoin regulations.

The paper indicates a phased approach to regulation, starting with fiat-backed stablecoins, followed by algorithmic and other digital assets in subsequent phases.