The UK’s HM Treasury published the results of a consultation about payment regulation and the ‘systemic perimeter’. The recommendations are far broader than systemic stablecoins, but stablecoins were one of the triggers for change. That’s because previously an infrastructure might be considered systemic based on a particular entity category such as a bank or e-money provider. Instead, the proposals aim to move away from the entity’s form and look at the risks.
One of the proposals is to add a new category of ‘service provider’. However, regarding systemic stablecoins, the recently passed Financial Services and Markets Act 2023 (FSMA 2023) already created a new category – the digital settlement asset service provider (DSA service provider).
The Bank of England will have the power to set limits on systemic infrastructures, which made some respondents hesitant. The government emphasized this is more likely to be applied to new entrants to ensure a “new activity scales safely”. It mentions one of the intentions of limits is to address new stability risks such as those presented by stablecoins.
How is systemic assessed?
Given entities will be deemed systemic based on the risks they pose, several respondents noted that those that purely facilitate payments don’t pose the same liquidity risks as those that hold store-of-value functions.
In the institutional space, this is a critical distinction. For example, Fnality is due to launch a digital currency-based settlement network and was declared systemically important last year despite the fact it is yet to launch. It issues a settlement token against deposits made by banks into a shared (omnibus) account at the Bank of England. Hence it provides ‘store-of-value’ functions, even if it is primarily targeting payments. It might reduce those risks by limiting overnight holdings.
In contrast, infrastructures such as Singapore’s Partior payment network which has global ambitions, claim it is simply providing a service and doesn’t hold any value itself.
Arguably Fnality and Partior are competitors. Two respondents noted “the need for consistency in the treatment of systemic entities against their non-systemic competitors.”
Multiple stablecoin regulators
Both the (Financial Conduct Authority) FCA and the Bank of England have roles in supervising systemic stablecoins and other systemic entities. Generally, the central bank is responsible for risks or prudential matters and the FCA for conduct. In case of insolvency, the Bank has the lead role. This approach has already been established for systemic stablecoins.
In some cases there will be overlaps and rules from one regulator will be switched off. A couple of respondents argued this overlap makes it tricky and unclear for new entrants. The government agreed that it needs to clearly set out the aspects where the Bank’s rules take precedence.
(Lack of) definition of stablecoins
One point that’s rarely mentioned is how the UK defines a stablecoin in FSMA 2023. In fact it doesn’t. Instead, it uses the term digital settlement asset (DSA) which has an incredibly broad definition that can be revised by the Treasury. It could encompass almost any digital currency or anything else digital that might be used for payments (eg. tokenized assets).
This could create headaches for compliance. What’s unclear is whether it might also cause contractual legal issues because in some legislation it is lumped in with “money”.
Here’s the definition in FSMA 2023:
“Digital settlement asset” means a digital representation of value or rights, whether or not cryptographically secured, that—
(a) can be used for the settlement of payment obligations,
(b) can be transferred, stored or traded electronically, and
(c) uses technology supporting the recording or storage of data (which may include distributed ledger technology).
In this section, “digital settlement asset” includes a right to, or an interest in, a digital settlement asset.”