Today the Financial Conduct Authority (FCA) published two consultation documents, one on stablecoin issuance and crypto custody, and the other on a prudential regime for crypto-asset firms. Responses are expected by 31 July.
In April HM Treasury published draft regulations for crypto-assets and stablecoins, which placed foreign issuers of stablecoins outside the scope of regulations. Much of the detailed rulemaking is delegated to the FCA, and in the case of systemic stablecoins, to the Bank of England.
In today’s consultation, the FCA explicitly envisages one of the use cases for stablecoins as the settlement of wholesale or institutional transactions. Meanwhile, some of the rules in today’s proposals are relatively relaxed, particularly with respect to stablecoin reserves.
Stablecoin reserves
When the FCA first consulted on the topic, it initially proposed that backing assets would be restricted to on demand bank deposits and short dated government bonds with a maturity of one year or less. It now plans to allow other assets, including longer dated public debt, repurchase (repo) agreements and reverse repo, and public debt money market funds. With the Trump administration’s talk of using stablecoins to increase demand for Treasury debt, one has to wonder if that’s not a driver of the UK’s inclusion of longer dated government debt.
It introduced some calculations to ensure sufficient liquidity, which appear somewhat relaxed. They include a minimum 5% of reserves in bank deposits and a combination of bank deposits and short dated bonds that is sufficient to meet peak redemption demands. We describe this as relaxed because redemption demand in normal times will be tiny compared to a crisis, which is usually unpredictable.
Additionally, the value of longer dated bonds can depreciate significantly when interest rates rise, potentially resulting in a shortfall in backing assets for the stablecoin. Higher quality stablecoins such as PayPal’s PYUSD and USDC surpass these requirements significantly. Their assets are entirely in cash, short dated Treasuries of less than 90 days and reverse repo.
Another relaxed requirement relating to reserves is that the counterparty in a repo or reverse repo agreement does not have to be based in the UK, which could make matters messier if something goes wrong.
Other stablecoin requirements
Beyond the stablecoin reserves, the consultation covers various other requirements for stablecoin issuers. For example, they are not allowed to pay holders interest and are required to keep the assets segregated in a statutory trust. Custodians of the reserves must be independent of the issuer. Any stablecoin holder can request direct redemption of any amount which should be actioned by the end of the following working day.
The FCA’s stated secondary objective of making the UK an attractive place for stablecoin issuers reflects growing international competition in this space. Hong Kong passed stablecoin legislation last week, while the US is advancing its GENIUS Act stablecoin bill. These relaxed reserve requirements may be part of the UK’s strategy to remain competitive in attracting stablecoin issuers amid this global regulatory race.
