European markets org cautions UK on stablecoin regulations and securities

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Responses to the discussion papers on stablecoin regulation in the United Kingdom were originally all due Feb. 6, but the Bank of England (BOE) has extended the comment period on its paper to the morning of Feb. 12. The deadline for comments on the Financial Conduct Authority (FCA) discussion paper remained Feb. 6. The Association for Financial Markets in Europe (AFME) submitted comments to the FCA on time. 

The discussion papers were released on Nov. 6 as part of a “joint publication package” that was seen as the first step in comprehensive crypto-asset regulation. Although thematically related, the agencies’ papers approach the topic from different angles.

The BOE mainly addressed issues related to the use of a sterling-backed retail-focused stablecoin in systemic payment systems, such as transfer functions and requirements for wallet providers. The FCA discussion paper examined a range of stablecoin use cases and concentrated on auditing and reporting, prudential requirements, backing and custodianship. It emphasized the principle of “same risk, same regulator outcome.”

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The FCA will also regulate custodianship, although the BOE saw the possibility that it would add requirements in addition to the FCA’s in cases such as off-chain transactions and Anti-Money Laundering and Know Your Customer requirements for unhosted wallets. Services that “may be systemic in their own right or provide essential services to systemic payment systems using stablecoins or recognised stablecoin service providers” may also be subject to dual regulation.

AFME managing director of technology and operations James Kemp praised the U.K. proposals in a statement as a “positive step.” He expressed concern about the treatment of securities tokens.

According to the FCA, securities tokens are “cryptoassets which […] already meet the definition of a specified investment under the RAO [the Financial Services and Markets Act 2000 through the Regulated Activities Order] and are therefore already subject to regulation.” Kemp said:

“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.”

The AFME spokesman also suggested that the FCA should parts of the proposal relating to stablecoins issued overseas until there are international frameworks and mature markets abroad.

Stablecoin regulations are expected to come into force in the U.K. in 2025.

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