British Financial Conduct Authority proposals loosen restrictions on stablecoin management and cryptocurrency operations
The UK's Financial Conduct Authority (FCA) has published two consultation documents detailing the regulatory framework for stablecoin issuance, crypto custody, and a prudential regime for crypto-asset firms. The aim is to make the UK an attractive place for stablecoin issuers, reflecting growing international competition in this space.
According to the consultation documents, stablecoin issuers must back their tokens with low-risk, secure, and sufficiently liquid assets. Allowed asset types include short-term cash deposits, government treasury instruments maturing in 1 year or less, UK government debt with long-dated maturities (with caution), and fixed one-year term deposits (less preferred).
The FCA's approach emphasizes safeguarding client assets and financial stability. The framework draws parallels with existing FCA safeguarding rules for Payments and E-Money Institutions, proposing that stablecoin backing assets require FCA approval, maintaining consistency and proportionality. The FCA allows some future flexibility to expand the asset pool, subject to notification.
Regarding liquidity calculations, the consultation focuses on ensuring assets are sufficiently liquid to meet redemption demands. The FCA introduces calculations to ensure sufficient liquidity, which appear somewhat relaxed. Assets must be high quality and low risk, with short-term maturities prioritized to minimize valuation volatility and support 1-for-1 redemption rights of tokens to backing assets.
Stablecoin issuers are required to keep assets segregated in a statutory trust. Custodians of stablecoin reserves must be independent of the issuer. Any stablecoin holder can request direct redemption of any amount, which should be actioned by the end of the following working day.
The inclusion of longer dated government debt in stablecoin reserves might be influenced by the Trump administration's talk of using stablecoins to increase demand for Treasury debt. However, the value of longer dated bonds can depreciate significantly when interest rates rise, posing a potential shortfall risk for stablecoin backing assets.
The counterparty in a repo or reverse repo agreement for stablecoin reserves does not have to be based in the UK, potentially complicating matters if something goes wrong. Hong Kong has recently passed stablecoin legislation, while the US is advancing its GENIUS Act stablecoin bill, indicating global regulatory competition in attracting stablecoin issuers.
Responses to the consultation are expected by 31st July. The regime aims to be flexible yet cautious, balancing innovation with prudential safeguards.
- The UK's Financial Conduct Authority (FCA) is seeking feedback on its proposed regulatory framework for stablecoin issuance, crypto custody, and a prudential regime for crypto-asset firms.
- The consultation documents detail that stablecoin issuers must hold their assets in a statutory trust, keeping them separate from the issuer's funds.
- The FCA's proposed regulations emphasize the importance of investing in low-risk, secure, and sufficiently liquid assets for stablecoin backing, with options like short-term cash deposits, government treasury instruments, and fixed one-year term deposits.
- The FCA's suggestions for stablecoin issuers include maintaining a high-quality, low-risk asset pool with short-term maturities to minimize valuation volatility and support 1-for-1 redemption rights of tokens to backing assets.
- The growing competition amongst global industries, including the personal-finance sector and technology, may influence the inclusion of longer dated government debt in stablecoin reserves, as seen with the Trump administration's discussion of using stablecoins to increase demand for Treasury bonds.
- The FCA expects responses to its consultation by 31st July, aiming to create a flexible yet cautious regime for the finance industry, striking a balance between fostering innovation and implementing prudential safeguards for stablecoins in the UK market, amidst international competition from countries like Hong Kong and the US.
