StakingMarketRegulationCryptostake ExplainsUncharted
Crypto Industry Leaders in the United Kingdom Are Concerned Over Proposed Stablecoin Regulations, Demand Revision

Industry voices concerns over UK's stablecoin regulatory proposals

As the UK navigates the complexities of integrating stablecoins into its financial ecosystem, crypto advocates are voicing significant concerns over the proposed regulatory framework. In November, the Bank of England (BoE) and the Financial Conduct Authority (FCA) laid out their initial plans through discussion papers aimed at regulating cryptocurrencies pegged to fiat currencies or other stable assets. 

The crypto industry's feedback reveals a mix of acknowledgment for the efforts but also a call for substantial revisions. Critics point out inconsistencies between the BoE and FCA's approaches, especially regarding the treatment of stablecoin issuers and their operational freedoms. This call for reevaluation underscores the industry's search for a balance between innovation and financial stability.

Polarized views between BoE and FCA on interest earnings

The heart of the debate lies in the differing perspectives of the Bank of England (BoE) and the Financial Conduct Authority (FCA) on how stablecoin issuers should manage and profit from reserve assets. The FCA, acknowledging the business model of stablecoin issuers, stated: 

"We propose that, under our regime, regulated stablecoin issuers can continue to retain, for their own benefit, the revenue derived from interest and returns from the backing assets." 

This approach aligns with the current market practices where issuers earn a significant portion of their revenue through interest on reserve assets.

Contrastingly, the BoE's stance introduces a more restrictive framework for systemic stablecoins, suggesting that issuers hold backing assets in central bank reserves. This proposal limits issuers' ability to generate interest income, potentially requiring a fundamental shift in business models for those affected. Paul Worthington, head of regulatory affairs at Innovate Finance, criticizes this approach: 

"The FCA is working with the way of the market and the way the market is developing, whereas the Bank of England is actually saying, 'No, you need to come up with an entirely new business model.'"

Reserve requirements: a stumbling block for stablecoin issuers

One of the most contentious aspects of the UK's proposed stablecoin regulations revolves around the reserve assets that back these digital currencies. The Financial Conduct Authority's (FCA) proposal suggests a conservative approach, limiting acceptable reserve assets to government treasury debt instruments with maturities of one year or less and short-term cash deposits. This restrictive stance has drawn criticism from various industry groups, advocating for a broader range of permissible assets to ensure operational flexibility and financial viability for issuers.

The Payments Association voiced its concern, stating:

 "Our members feel that limiting the acceptable backing assets will be an impediment to issuers wanting to run a stablecoin in the U.K." 

They argue that earning returns on the funds backing a stablecoin represents a critical revenue driver for potential issuers, necessitating more flexibility in regulation.

Echoing this sentiment, CryptoUK highlighted the need for a higher degree of flexibility in backing assets to "increase diversification and reduce the risks facing issuers, and by extension, the risks that consumers face by investing into this sector." They draw a parallel to Singapore’s reserve requirements, which allow stablecoins to be backed by “highly liquid and low-risk assets,” including cash and cash equivalents, presenting a model that the UK might consider emulating.

UK Finance also weighed in, advocating for fiat-referenced stablecoins to have as much flexibility as e-money in terms of what assets can constitute reserves. Their response underscores a broader industry call for regulatory parity, where similar risks are managed with similar frameworks.

The debate over compensation and consumer protection

The Financial Conduct Authority's (FCA) proposed framework for stablecoin regulation also broached the topic of compensation, notably excluding stablecoin providers from its Financial Services Compensation Scheme (FSCS). This scheme offers compensation up to £85,000 ($107,300) to customers when a company fails to return what they owe due to bankruptcy. The exclusion has sparked a debate within the crypto community about the adequacy of consumer protection in the stablecoin market.

Su Carpenter, director of operations at Crypto UK, expressed the group's disagreement with this exclusion: 

"In all honesty, we don't agree with that, and if stablecoins are going to fall within the regulated perimeter, then if – for example – fraud is taking place, then why shouldn't it be covered by the FSCS?" 

This sentiment underscores a fundamental concern over safeguarding consumer interests in the face of potential market failures or fraudulent activities.

On the other hand, The Payments Association raised concerns about the feasibility of applying the FSCS to the crypto asset market at its nascent stage. They argue, 

"It is difficult to apply FSCS at this nascent stage of the crypto asset market, as it is unclear what the size of the market will be and how many issuers will seek authorization in the U.K." 

This perspective points to the complexities of preemptively determining levies and conducting cost-benefit analyses for a rapidly evolving industry.

The FCA's stance and the industry's responses highlight a critical area of contention: how to balance the need for consumer protection with the practicalities of regulating a novel and rapidly changing sector.