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  • The UK is expected to introduce legislation pertaining to fiat-backed stablecoins in the early part of the upcoming year.
  • These discussion papers represent the initial phase in shaping the new regulatory framework.

UK financial regulators have unveiled their plans to regulate stablecoins in the country. The Bank of England (BOE) and the Financial Conduct Authority (FCA) presented their proposals in discussion papers.

This proposal has built upon the broader framework for crypto sector oversight that the UK government revealed last week.

The BOE has indicated that these proposals will be open to feedback from stakeholders. Following this feedback phase, the regulators will proceed to consult on the final rules and guidelines.

A noteworthy aspect of the BOE’s role in this regulatory framework is its focus on “systemic stablecoins.” These are coins that have gained widespread circulation and the potential to disrupt financial stability.

Meanwhile, the FCA will assume the responsibility of overseeing the broader crypto sector. This is to ensure that the entire ecosystem remains compliant and accountable.

Proposals from major tech giants like Facebook (now Meta) and PayPal to issue stablecoins have catalyzed regulatory efforts worldwide. This was combined with the collapse of the stablecoin empire Terra [UST] last year.

Entities like the European Union and Japan have recently finalized regulatory regimes to address these challenges.

Proposals to pave the way for increased crypto regulations in the UK

The UK, aspiring to position itself as a cryptocurrency hub, has been proactive in bringing stablecoins under the purview of the country’s payments regulation.

Back in June, the UK executed this move. Furthermore, the UK plans to introduce legislation related to fiat-backed stablecoins in the early part of the upcoming year.

The BOE meticulously tailors its approach to focus on stablecoins pegged to the British pound. This is driven by the belief that these digital assets are likely to play a crucial role in the payment ecosystem.

The central bank published its plans alongside a letter from the country’s Prudential Regulations Authority (PRA) directed to deposit-takers.

It clarified that traditional deposit takers have different protections compared to users of stablecoins.

The key differentiator, highlighted in the PRA’s letter, is the perceived lower contagion risk for stablecoins used within systemic payment systems regulated by the Bank of England, in contrast to e-money or other regulated stablecoins under the FCA’s purview.

FCA’s plans

In parallel, the FCA clearly outlines its role in the regulatory framework in its paper, mandating that stablecoin issuers must seek authorization to circulate fiat-backed stablecoins in or from the UK.

This ensures that these digital assets are backed by “appropriate” assets that can be effortlessly redeemed for fiat currencies, irrespective of technical or liquidity challenges.

Additionally, the FCA proposes to grant regulated stablecoin issuers the freedom to retain revenues generated from “interest and return from the backing assets.” This move aims to establish a clear distinction between stablecoins and traditional deposits.

However, the FCA acknowledges potential consumer concerns. This is particularly if interest rates remain high or experience significant increases, given the expectation that regulated stablecoin backing assets will be safeguarded as client assets.

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