UK progresses plans for systemic stablecoin regime

Getting your Trinity Audio player ready...

The U.K. Treasury has released a consultation response on systemic stablecoins, which updates proposals for a regulatory regime for systemic stablecoins. The government proposed that systemic stablecoins would be supervised by the Bank of England and the Financial Conduct Authority (FCA), the former taking charge of “prudential matters,” while the FCA would cover conduct.

The consultation was titled ‘Payments Regulation and the Systemic Perimeter’ and outlined plans to bring “systemically important stablecoins used as a means of payment” within existing banking regulations.

“A clear majority agreed with the government’s principles to reforming this perimeter to ensure that the Bank’s capacity to mitigate acute financial stability risks kept pace with the evolution of the payments sector at large,” the consultation paper read.

The 40-page paper concluded that this was best achieved through the Banking Act 2009, which “was well understood and remained appropriate for any future systemic payments entities that the Bank might supervise over.”

The paper expanded on this by laying out what could be expected of different bodies if the BoE is put in charge of systemic stablecoins. The BoE would supervise “prudential matters,” aspects of structure and operation that affect financial integrity, while the FCA would head up conduct, which covers the actions and practices of an entity.

The consultation also stated the BoE would be given the power to prevent the FCA from taking action against a systemically important entity if those actions caused concern about financial stability. In this case, the Prudential Regulation Authority would have the authority to step in.

The consultation received 23 responses from various financial services players, including PayPal (NASDAQ: PYPL), HSBC UK, Circle, and Barclays, from whom the feedback was “largely positive concerning the government’s assessment of the evolution of systemic risk.”

However, a proposal that raised some concerns amongst respondents was that systemic payment entities would be overseen by the Financial Market Infrastructure SAR (FMI SAR) in cases of insolvency. As of a 2022 consultation, the FMI SAR has the new objective of returning customer funds, alongside ensuring operations continue.

“A few others noted concerns that adding a new objective for returning customer funds to all systemically important payments entities may lead to situations where this was prioritised over ensuring continuity of service to mitigate acute stability risks,” said the consultation.

On this, the government stated that it would continue to work with regulators and firms to keep the regime under review.

The U.K. recently passed the Financial Services and Markets Act (FSMA) 2023 into law, which extended the banking rules of the previous FSMA iteration to stablecoins and digital assets, giving the BoE the necessary powers to set up a systemic stablecoin regime.

London Blockchain Conference 2023: Regulatory frameworks for digital currency in Europe