The United Kingdom government has released an update on its plans to regulate fiat-backed stablecoins, aiming to facilitate and control their use in UK payment systems. The document, published on October 30, outlines the government’s intention to introduce legislation in 2024 that would make the regulation of these stablecoins the responsibility of the Financial Conduct Authority (FCA).

The Treasury is considering designating local companies as “arrangers of payment,” authorized by the FCA, to ensure that overseas stablecoins meet local standards. In contrast, non-fiat-backed stablecoins, including algorithmic ones, will not be permitted in regulated payment systems. While the document does not impose a direct ban, it states that transactions involving these stablecoins will remain unregulated and subject to the same requirements as unbacked cryptoassets.

Under the new regulations, the FCA will have the authority to require stablecoin issuers to hold all reserve funds in a statutory trust, with redemption obligations outlined in the FCA’s rules. In the event of a company’s failure, UK stablecoin issuers will be subject to procedures under the Insolvency Act 1986.

The regulatory powers outlined in the document are derived from the Financial Services and Markets Act, which was passed by the British Parliament’s upper Chamber in June 2023. Referred to as the FCMA 2023, this framework grants the Treasury, the Bank of England, and the FCA the authority to regulate cryptocurrencies and stablecoins.

FAQs

What are stablecoins?

Stablecoins are a type of cryptocurrency that is pegged to an underlying asset, such as fiat currency (e.g., USD, EUR). Their value is designed to remain stable, providing a digital alternative to traditional volatile cryptocurrencies like Bitcoin.

Why is the UK government regulating stablecoins?

The UK government aims to regulate stablecoins to ensure they are used safely and in compliance with financial regulations. By establishing clear rules and oversight, the government aims to protect consumers, maintain financial stability, and prevent illicit activities such as money laundering and terrorist financing.

What is the role of the Financial Conduct Authority (FCA) in regulating stablecoins?

The FCA is the regulatory body responsible for overseeing financial markets and firms in the UK. Under the proposed regulations, the FCA would have the authority to regulate stablecoins and ensure that issuers meet certain standards, such as holding reserve funds in a statutory trust.

What are the implications for stablecoin issuers?

Stablecoin issuers in the UK would need to comply with the regulations set forth by the FCA, including holding reserve funds in a statutory trust and meeting redemption obligations. Failure to comply could result in legal procedures under the Insolvency Act 1986 in the event of a company’s failure.

Will all types of stablecoins be allowed in regulated payment systems?

No, only fiat-backed stablecoins will be permitted in regulated payment systems. Non-fiat-backed stablecoins, including algorithmic ones, will not be allowed and will remain unregulated.

Summary

The UK government has released its plans to regulate fiat-backed stablecoins, aiming to introduce legislation in 2024 that would bring the regulation of these stablecoins under the jurisdiction of the Financial Conduct Authority (FCA). The regulations propose that stablecoin issuers hold all reserve funds in a statutory trust and comply with redemption obligations outlined by the FCA. Non-fiat-backed stablecoins, however, will not be permitted in regulated payment systems. The regulatory framework for stablecoins is derived from the Financial Services and Markets Act, granting regulatory authority to the Treasury, the Bank of England, and the FCA.