In November, the Bank of England (BoE) and the Financial Conduct Authority (FCA) released discussion papers outlining their regulatory plans for cryptocurrencies pegged to fiat currencies or other stable assets. Responses from industry players indicate that UK crypto advocates have mixed feelings about the proposals, acknowledging some positive aspects but highlighting the need for reconsideration in various areas.
Both regulators aim to supervise stablecoins, with the FCA focusing on regulating the issuance, custody, and use of fiat-referenced stablecoins for payments. The BoE, on the other hand, plans to oversee systemic payment systems involving stablecoins, specifically those that, if widely circulated, could impact financial stability if their issuers face insolvency. Concerns arise among UK crypto advocates regarding potential misalignment between the two regulators, particularly concerning issuers’ ability to earn interest on reserve assets backing the circulating tokens.
The FCA recognizes in its discussion paper that stablecoin issuers derive a significant portion of their revenue from investing reserve assets and earning interest. In its proposals, the FCA suggests that “regulated stablecoin issuers can continue to retain, for their own benefit, the revenue derived from interest and returns from the backing assets”.
In contrast, the BoE proposes that issuers of systemic stablecoins should hold backing assets in central bank reserves, limiting their ability to earn interest. Paul Worthington, head of regulatory affairs at Innovate Finance, points out the divergence in approaches, stating that “The FCA is working with the way of the market and the way the market is developing, whereas the Bank of England is actually saying, ‘No, you need to come up with an entirely new business model'”.
Worthington emphasizes the challenge faced by stablecoin firms transitioning from FCA oversight to the BoE’s jurisdiction if they become systemic. “Suddenly, you can’t earn revenues from the assets; you can’t earn interest. So you have to totally pivot your entire business model,” Worthington said. “But that’s not a model for growth.” he added.