A New Regime Governing Stablecoins

FIAT-BACKED STABLECOINS

STABLECOINS USED IN SYSTEMIC PAYMENT SYSTEMS (SSPSs)

DEFINITION

Digital assets that are developed to maintain a stable value relative to a fiat currency and supported by assets backing the issuance.

Fiat-backed stablecoins that are used as digital settlement assets by a payment system recognised as systemic by HMT.

BACKING

The FCA’s proposals would require the assets backing the stablecoins to be stable and sufficient in value, while liquid in nature.

The FCA favours that regulated issuers back their stablecoins with only cash and short-term government bonds.

The Bank of England does not consider assets giving rise to credit, liquidity or market risks to be appropriate backing for the stablecoins.

The Bank of England favours the use of central bank deposits to back stablecoins issued by SSPSs. This approach enables:

(i) Stablecoins to keep their value constant.

(ii) Greater certainty in making or receiving payments.

(iii) Straightforward currency exchanges.

(iv) Perfect redemption.

This option is intended to preserve the “singleness of money.”

REMUNERATION

The FCA proposed a prohibition on the payment of income or interest by issuers to their customers in relation to stablecoin holdings. The FCA noted that this would draw a bright line between traditional deposits and stablecoins.

The FCA also noted that it is a stablecoin’s underlying assets that generate returns for issuers, rather than the stablecoins themselves. The FCA expressed no objection to this revenue stream persisting under the regime.

The Bank of England expects issuers to derive income in exchange for providing a payment service, and not to offer interest to the holders of stablecoins in a systemic payment system.

REGULATION OF ISSUERS

The FCA’s objective is to ensure holders of a fiat-backed stablecoin can redeem their tokens at par value.

The proposal would require issuers to ensure the right to redemption at par by the close of the business day following the date of request, subject to the completion of any customer regulatory checks.

The FCA expects redemption:

(i) To be disclosed in an accessible policy on a website.

(ii) Not to carry disproportionate fees.

(iii) To require AML checks.

(iv) To reflect the stablecoin’s denominated currency.

The Bank of England would require issuers not to impose any unwarranted barriers to redemption under the proposed regime: Redemption should be effected in real-time as far as practicable, and by the close of day on the date requested.

The Bank of England is considering either banning redemption fees outright or restricting them to a cost-based sum. In relation to such fees, the bank noted the risk of incentivising disposals via secondary markets rather than redemption, which could impact the ability to redeem at par.

SAFEGUARDING

The FCA proposes a safeguarding regime in which assets would be segregated and held in a statutory trust. Under such a structure, the issuer’s customers would stand as beneficiaries. This arrangement would prevent losses and claims arising from an issuer’s possible insolvency because trust assets would not form part of an insolvent estate.

Because the FCA’s regime stipulates a par redemption rate, the authority proposes requiring issuers to either add or deduct assets from the pool to recalibrate the coin-asset value ratio. Issuers would be required to do this within a business day where a discrepancy exists.

The FCA is further considering requiring issuers to have a CASS oversight officer responsible for supervising the assets. Under the proposed regime, the FCA would impose the same requirements on such an officer as are required in traditional financial contexts.

The FCA also proposes a custody model in which an independent custodian would hold assets directly for coinholders.

The Bank of England proposes safeguarding rules that would require backing assets to be held in a segregated account and insulated from the claims of creditors. The bank also favours the use of trust arrangements.

To ensure that the value of assets and issued stablecoins correspond, the central bank proposes a requirement that issuers conduct reconciliation as frequently as necessary to maintain equivalence, and at least daily.

Additionally, the Bank of England proposes further requirements related to reporting, auditing and disclosure.

The Bank of England also sets out its expectations for a custodian of assets backing SSPSs, which include coinholder verification; securely held authentication records; management of coinholders’ control of and legal entitlements to their stablecoins; segregation of assets; holding records; and maintenance of strict risk management and consumer compensation arrangements.

CAPITAL REQUIREMENTS

The FCA’s proposed capital requirements for stablecoins largely reflect those found in the Investment Firms Prudential Regime (IFPR). Specifically, the requirements would be based on the higher of:

(i) A permanent minimum requirement (PMR). The PMR would be the minimum sum needed to qualify for FCA authorisation and would be set according to the type of cryptoasset activity conducted.

(ii) A fixed overhead requirement (FOR). The FOR is in place to cover expenditures incurred in a period to ensure sufficient capital to enable an orderly winding down, and would be largely based on the previous year’s expenditure.

(iii) A risk-based “K-Factor” requirement (KFR). The KFR would vary according to the stablecoin activities and the size of the business.

The amount of the issuer’s stablecoins in circulation would largely determine the KFR.

The Bank of England proposes subjecting issuers to capital requirements that extend beyond coverage of asset-backing and safeguarding requirements and requiring issuers to provide for alternative risks that might threaten a firm’s asset pool or solvency. The bank has not explicitly set out what these capital requirements would be.