In the United Kingdom, the crypto industry is facing a regulatory puzzle as industry groups push back against proposals from local regulators regarding the supervision of stablecoins. The Bank of England (BoE) and the Financial Conduct Authority (FCA) released discussion papers in November outlining their plans for regulating cryptocurrencies pegged to the value of fiat currencies or other steady assets. However, responses from industry stakeholders suggest a mixed reception to the proposals, with calls for significant revisions.
United Kingdom groups call for bill revision
Both the FCA and the BoE intend to supervise stablecoins, albeit with different focuses. The FCA will regulate the issuance and custody of fiat-referenced stablecoins, as well as their use as a means of payment. Meanwhile, the BoE plans to oversee systemic payment systems involving stablecoins, which are those with widespread circulation capable of affecting financial stability if their issuers face insolvency.
One point of contention among crypto advocates is the divergence in treatment of stablecoin firms by the two regulators, particularly concerning the ability of issuers to earn interest on reserve assets backing the tokens. While the FCA proposes allowing regulated stablecoin issuers to retain interest revenue from backing assets, the BoE suggests requiring issuers of systemic stablecoins to hold backing assets exclusively in central bank reserves, thus limiting their ability to earn interest.
This discrepancy has raised concerns among United Kingdom’s industry experts, with some arguing that it could stifle innovation and growth within the sector. Paul Worthington, head of regulatory affairs at Innovate Finance, suggests that the BoE’s approach imposes significant constraints on stablecoin firms, requiring them to overhaul their business models if they were to grow to a systemic level. Such a shift, he argues, may deter potential growth opportunities.
Su Carpenter, director of operations at Crypto UK, echoes these sentiments, highlighting the potential future problems arising from the differing regulatory approaches. The inconsistency between the FCA and the BoE could pose challenges for stablecoin issuers as they navigate evolving regulatory landscapes.
Debates in the UK crypto industry
Another area of concern is the proposed asset backing for stablecoins. The FCA’s suggestion to limit acceptable backing assets to short-term government treasury debt instruments and cash deposits has drawn criticism from industry groups in the United Kingdom, such as The Payments Association, who argue that this restriction could hinder issuer flexibility and revenue generation.
Advocates emphasize the importance of diversification and risk reduction through greater flexibility in backing assets. In contrast, the BoE’s proposal to restrict backing assets to central bank deposits has also been met with skepticism. The Digital Pound Foundation warns that this approach would severely limit the options available to stablecoin issuers, potentially stifling innovation in the sector.
Additionally, the FCA’s proposal to exclude stablecoin providers from the Financial Services Compensation Scheme (FSCS) has sparked debate within the industry. While some, like Su Carpenter, argue that stablecoins falling within the regulated perimeter should be covered by the FSCS to protect consumers in case of fraud, others, such as The Payments Association, believe that further review is necessary due to uncertainties surrounding the size and scope of the crypto asset market.
Overall, the United Kingdom’s approach to regulating stablecoins is facing scrutiny from industry stakeholders who are calling for greater alignment between regulatory bodies and more flexibility in regulatory frameworks. As the crypto industry continues to evolve, finding a balanced approach that fosters innovation while ensuring consumer protection will be essential for the United Kingdom to remain competitive in the global marketplace.
