European Markets Org Issues Caution to UK on Stablecoin and Securities Regulations

The Bank of England (BOE) and the Financial Conduct Authority (FCA) in the United Kingdom released discussion papers on stablecoin regulation on November 6. Initially, the deadline for responses to the papers was set for February 6, but the BOE has extended the comment period for their paper until the morning of February 12. The deadline for comments on the FCA’s discussion paper remained February 6.

The Association for Financial Markets in Europe (AFME) submitted comments to the FCA on time. The discussion papers are part of a comprehensive crypto-asset regulation initiative and address stablecoin regulation from different perspectives. The BOE focused on issues related to using a retail-focused stablecoin backed by the sterling in systemic payment systems. The FCA’s paper explored various use cases of stablecoins and emphasized auditing and reporting, prudential requirements, backing, and custodianship. They stressed the principle of “same risk, same regulator outcome.”

While both agencies will regulate custodianship, the BOE suggested the possibility of adding requirements beyond the FCA’s regulations for off-chain transactions and Anti-Money Laundering and Know Your Customer requirements for unhosted wallets. Services that are systemically important or provide essential services to systemic payment systems using stablecoins may be subject to dual regulation.

AFME’s Managing Director of Technology and Operations, James Kemp, commended the U.K. proposals as a positive step. He raised concerns about the treatment of securities tokens. According to the FCA, securities tokens are already subject to regulation as they meet the definition of specified investments under the Financial Services and Markets Act 2000. Kemp argued that since security tokens are essentially securities, they should be treated as such throughout their lifecycle and should not be subject to separate regulatory treatment and territorial scope for custody as proposed by the FCA.

AFME suggested that the FCA should postpone implementing parts of the proposal related to stablecoins issued overseas until international frameworks and mature markets are established abroad. The UK aims to enforce stablecoin regulations by 2025.