FCA Consults on Stablecoin and Crypto Custody Regulation

UK regulator, the Financial Conduct Authority (FCA), has published two papers and started a consultation process as the latest step in its efforts to build a regulatory regime for crypto assets and stablecoins.

In its paper on stablecoin issuance, the FCA observes, “Were an existing stablecoin issuer to fail today, it may be unclear to its holders how they could get their money back. The contractual rights that stablecoin holders may have over any money or assets held by the issuer may vary, and the issuer may not have strictly segregated the money or assets backing the stablecoin from its own assets. Regulating fiat-referenced stablecoins will not prevent failures, but it will help to reduce the probability and impact.”

The proposed new regulatory regime means that stablecoin issuers, while still being required to meet money laundering regulations, will have to shift from being registered with the FCA, to being authorised, meaning they can be subject to closer supervision. For those that will be engaging with the FCA for the first time, the regulator states in the report, “We intend to apply the same regulatory approach to qualifying stablecoin issuers and qualifying cryptoasset custodians and associated individuals as we do to other regulated firms.”

Citing the papers as the latest milestone on the road to crypto regulation, the FCA says the proposals are the result of extensive engagement through roundtables and feedback on previous discussion papers. It adds the proposed rules aim to ensure regulated stablecoins maintain their value, and that customers are provided with clear information on how the backing assets are being managed.

The proposals would require firms providing crypto custody services, who have responsibility for keeping consumers’ crypto safe, to ensure they are effectively secured and can be easily accessed at any time. The proposals also seek to reduce the likelihood and impact of firm failures across regulated firms undertaking the activities of stablecoin issuance and cryptoasset custody. 

In support of the opportunities stablecoins present to financial services and the broader economy, the FCA says it will explore adding a specific focus on stablecoins to its innovation services in the coming months.  

“At the FCA, we have long supported innovation that benefits consumers and markets,” says David Geale, executive director for payments and digital finance at the FCA. “At present, crypto is largely unregulated in the UK. We want to strike a balance in support of a sector that enables innovation and is underpinned by market integrity and trust.”

The FCA will work closely with the Bank of England on the upcoming regime to ensure a clear pathway in regulation for stablecoins. Sarah Breeden, deputy governor for financial stability at the Bank of England, says, “We welcome the proposals the FCA have published as part of building the UK’s stablecoin regime. For those stablecoins that expect to operate at systemic scale, the Bank of England will publish a complementary consultation paper later this year, including responding to industry feedback around allowing some return on backing assets. We continue to work closely with the FCA to ensure the integrity of the UK’s stablecoin regime, including how firms transition within the regime.”

The stablecoin and crypto custody consultation paper can be found here, and the prudential regulation of crypto assets paper here.