In November the United Kingdom launched a consultation around the implementation of stablecoin regulations, which closes today. New rules will cover stablecoins used for payments, issuance and custody. However, a key aspect of the planned rules announced by HM Treasury has little to do with stablecoins other than technology. Custody of security tokens will no longer be regulated as ‘specified investments’ but instead fall under rules for custody of fiat-backed stablecoin tokens issued in (or from) the UK.
Capital markets participants won’t like this. It adds considerable complexity to compliance. Hence, the Association for Financial Markets in Europe (AFME) has something to say about it.
“The UK’s plan to bring stablecoins into the regulatory perimeter is a positive step towards creating a safe and sound system for cryptoassets, and towards promoting confidence in DLT-based capital markets,” said James Kemp, Managing Director of Technology and Operations at AFME.
He added, “security tokens, are inherently securities and should be treated as such throughout their lifecycle. To preserve market functioning, it is important that they are not subject to the separate regulatory treatment and territorial scope for custody proposed by the FCA.”
Special custody rules for security tokens
The Financial Conduct Authority (FCA) is responsible for the supervision of most stablecoins other than systemic ones. Hence, it is drafting the rules around custody. In its paper, the FCA states that it will base many new rules on existing CASS (Client Assets Sourcebook) rules, which apply to conventional custodians. However, it’s considering adjusting some rules to account for unique risks. A key driver seems to be a willingness to acknowledge a blockchain record as the record of ownership rights.
AFME is particularly concerned about messy jurisdictional issues. The new custody rules will cover stablecoins issued within the UK, and hence it’s assumed they will cover security tokens issued in the UK. However, there are also plans for separate future rules to cover stablecoins issued outside of the UK but used in the UK for payments. Hence, it’s unclear how that impacts custody.
“This proposed treatment would represent a significant departure from the way the territorial scope for regulated financial services activities (including the custody of security tokens) is currently determined under the UK framework,” it said in a statement.
Other stablecoin concerns
As AFME represents capital markets, it’s natural wants high quality corporate securities considered as stablecoin backing assets. Hence, it proposes that mainstream stablecoin backing assets should be expanded beyond short term government securities and bank deposits. Plus, it wants the systemic stablecoin requirements to support assets other than central bank deposits.
Another issue relates to stablecoins issued overseas. The FCA is looking to require a UK payment arranger to be involved in overseas stablecoin transactions. “It is imperative that wholesale financial institutions should be able to easily access and use overseas issued stablecoins (e.g. USDC),” AFME said in its statement.