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Regulating Stablecoins: Regulating Fiat-Backed Stablecoin Payment Activities

Regulating Stablecoins: Regulating Fiat-Backed Stablecoin Payment Activities

Regulating StablecoinsAn Overview of FCA’s Discussion Paper DP234 on Regulating Stablecoins.

In a significant stride towards refining the regulatory landscape for stablecoins, the Financial Conduct Authority (FCA) has recently published its discussion paper, DP23/4, delineating a framework for the use of fiat-backed stablecoins in payment services. This initiative dovetails with the preliminary proposals from HM Treasury (HMT) and marks a pivotal juncture in the evolution of digital currency regulation in the United Kingdom.

Regulating Stablecoins: The Aims of the Proposed Regulatory Framework

The framework’s primary objective is to safeguard consumer interests under the Consumer Duty and bring stablecoin-based payment services to parity with the existing standards for regulated payment service providers (PSPs). It’s a step towards fostering an environment conducive to innovation and healthy competition, aligning with consumer interests.

Regulating Stablecoins: Examining the Payment Services Regulatory Approach

1. Adapting Existing Regulations: The Payment Services Regulations (PSRs) 2017 currently oversee fund transfers, including non-cash and electronic money. However, they fall short of encompassing value transfers via alternative assets, such as fiat-backed stablecoins. The proposal suggests expanding the PSRs’ purview to include stablecoin-based payment models:

  • The Hybrid Model: Here, stablecoins serve as intermediaries at the start or end of a conventional fiat payment chain. For instance, a consumer might use a stablecoin for purchasing, and the PSP would convert it to fiat for the merchant payment.
  • The Pure Stablecoin Model: In this model, both parties transact entirely in stablecoin, with on-chain transfers.

2. Scope and Conduct: Some aspects of these models would fall under the PSRs, such as a stablecoin payment interface being classified as a payment instrument. However, full end-to-end regulation for stablecoin payments isn’t envisaged, with certain service elements remaining unregulated.

Regulating Stablecoins: Key Regulatory Aspects

  • Conduct Requirements: The FCA suggests applying existing conduct rules to both pure and ancillary stablecoin payment activities.
  • Custody and Safeguarding: Similar safeguarding norms as in the PSRs are expected to apply to stablecoin payments.
  • Money Laundering: Both stablecoin payment models would adhere to the Money Laundering Regulations (MLRs).
  • Operational Resilience: Payment arrangers should maintain robust operational and prudential resilience, akin to existing requirements for stablecoin issuers and custodians.
  • Dispute Resolution: All PSPs within this scope should comply with the FCA’s dispute resolution sourcebook (DISP) and provide access to the Financial Ombudsman Service (FOS).

Regulating Stablecoins: Dealing with Overseas Stablecoins

Overseas fiat-backed stablecoins can be used in the UK, provided they meet certain standards. Payment arrangers must assess these against criteria equivalent to those for UK-regulated stablecoins. This includes appointing an independent auditor for regular assessments. The FCA may require prompt communication and action from payment arrangers if an approved overseas stablecoin falls out of compliance.

Regulating Stablecoins: Conclusion and Next Steps

The FCA invites stakeholder input on these proposals until 6 February 2024. Based on feedback, the FCA will draft new rules and consult on them. A new consultation on final rules for regulating payment services using stablecoins is anticipated in the first half of 2024.


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