Hot on the heels of its consultation on bringing cryptoasset inside the scope of the financial promotions regime at the tail end of last year, the FCA has launched a further consultation on the UK’s regulatory approach to cryptoassets and stablecoins.
In essence the FCA is considering introducing a new category of crypto token (in addition to the current classifications of security token, e-money token and unregulated token) known as “stable tokens”. These would be a regulated category of token, which attempts to stabilise its value by reference to underlying assets such as fiat currency or a commodity. This captures most current stablecoin structures, but not currently algorithmic stablecoins.
The FCA is concerned that stablecoins in particular might come to be more commonly used in transactions, unlike current cryptoassets which are mostly used for speculative investment. In the FCA’s opinion without additional regulation this would give rise to risks to financial stability and market integrity, risks to consumers (not least the loss of their money through price volatility) and risks to competition if particular stablecoins become dominant in the market.
As a result, they are proposing a new regulatory regime, which will apply to issuers of relevant stable tokens to consumers (whether directly or indirectly) and firms providing services to them such as exchanges and wallet providers. The FCA’s view is that firms undertaking the following activities should be regulated:
- issuing, creating or destroying asset-linked or single fiat-linked tokens;
- value stabilisation and reserve management;
- validation of transactions;
- transmission of funds;
- providing custody and administration of a stable token for a third party;
- executing transactions in stable tokens; and
- exchanging tokens for fiat money and vice-versa.
In terms of the regulations themselves, the FCA anticipates that for straightforward single-fiat stable tokens it will be broadly based on current e-money and payments regulation. For tokens backed by other assets (eg commodities such as oil or gold or a multi-currency basket of fiat currencies) a more bespoke set of regulations may be used as, for example, additional rules around how reserves supporting the tokens are to be held may be required. For both types there will also be enhanced requirements if the token becomes of systemic importance. The FCA anticipates that the following regulatory requirements will be necessary:
- authorisation to operate (with associated threshold conditions);
- prudential requirements, including with respect to capital, liquidity, accounting and auditing;
- requirements for the maintenance and management of the asset reserve
- orderly failure and insolvency requirements;
- safeguarding the token;
- systems, controls, risk management and governance;
- notification and reporting;
- recording keeping;
- conduct requirements;
- financial crime rules;
- outsourcing requirements to ensure continuous and adequate functioning;
- operational resilience, service reliability and continuity requirements; and
- security requirements (including cyber and cloud security).
On the other hand, the FCA does anticipate that the new regime may allow for exclusions from the requirements, as is common with other regulated activities. For example if a stable token is used within a limited network of providers or for acquiring a very limited range of goods or services the firms involved might not need to be regulated. There is also a suggestion that there might be a lighter regime for firms with limited turnover.
With respect to stable tokens with systemic scale (or the potential to reach systemic scale), the FCA notes that additional regulation may be applied by the Bank of England.
Finally, the FCA is considering whether there should be an express requirement for firms marketing stable tokens to UK customers should be required to have a UK establishment and be authorised in the UK. The requirement for a UK establishment, in particular, may be onerous for smaller overseas firms.
The consultation closes on 21 March 2021, and the FCA has invited stakeholders to provide responses to the various questions the FCA has set out in its paper.
As ever with the FCA and crypto-regulation, the current proposals are unlikely to be the end of the process and further regulation can be expected as the market develops and matures.