UK Finance, the collective voice for the UK banking and finance industry, shared its response to the UK stablecoin consultation that closed yesterday (one of the deadlines was extended). While regulating stablecoins is welcomed, UK Finance members aren’t happy about the custody of security tokens sharing the same rules as stablecoins. AFME also focused on this point in its consultation response. Secondly, UK Finance requested separate rules for stablecoins used for wholesale purposes.
There are two aspects to the consultation, which started on November 6. The Financial Conduct Authority (FCA) will oversee most stablecoins, and a separate Bank of England consultation covers systemic stablecoins. UK Finance responded to both, but we’ve focused on the former. The Bank of England recently extended its response deadline to February 12.
Custody of security tokens
Most regulations attempt to be technology agnostic. Classifying the custody of digital securities with stablecoins rather than conventional securities is at odds with this. “Security tokens have more characteristics in common with traditional assets when compared to stablecoins or any other cryptoassets,” UK Finance notes.
Custodians are generally responsible for assessing their ability to safeguard assets. Hence, any additional technical requirements could be dealt with under existing CASS (custody) rules.
Doubtless, the main gripe is another layer of compliance complexity for organizations that handle both conventional and digital securities.
MiCA in the EU classifies digital securities as out of scope – they fall under MiFID II. Hence, UK Finance wonders if this rule might put the UK at a competitive disadvantage.
UK Finance is keen to separate wholesale and retail stablecoins. That’s particularly because many wholesale users are already subject to supervision, so they’d expect a lighter touch.
One of the main wholesale use cases is for programmable delivery versus payment for securities settlement. Another application is wholesale payments, where stablecoins could be useful for on-chain payments. The UK Finance response notes that where a wholesale CBDC is available, some participants, such as corporates or asset managers, may not have access to the CBDC. Hence, they could use a stablecoin instead. It doesn’t mention that Fnality technically offers a synthetic wholesale CBDC in the UK.
The UK proposals will require stablecoin issuers to be able to provide consumer redemptions directly. Today, most stablecoins only provide redemptions via intermediaries rather than directly to consumers. Hence, for a wholesale stablecoin to support consumer redemptions doesn’t make sense.
UK Finance also wasn’t keen on the FCA’s proposed jurisdictional rules around stablecoins. In particular, the FCA plans to require stablecoins not issued in the UK to be assessed by a licensed ‘payment arranger’ with reviews on an ongoing basis. They make sense for consumer protection but could be overly restrictive for wholesale.