The FCA bundles stablecoins into new crypto regime
The FCA has published proposals for ensuring financial resilience in the face of upcoming regulations governing cryptoasset firms, with an added focus on stablecoins.
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The watchdog says that stablecoins have the potential to drive efficiency in payments and settlement using blockchain technology, with particular benefits for cross-border transactions.
It says its proposed rules aim to ensure regulated stablecoins maintain their value. They also mean that customers should be provided with clear information on how the backing assets are being managed.
David Geale, executive director for payments and digital finance at the FCA, says: 'At the FCA, we have long supported innovation that benefits consumers and markets. At present, crypto is largely unregulated in the UK. We want to strike a balance in support of a sector that enables innovation and is underpinned by market integrity and trust.'
The UK government in April published draft legislation that will bring crypto firms into the regulatory perimeter.
Geale says the FCA will work closely with the Bank of England on the upcoming regime to ensure a clear pathway in regulation for stablecoins.
Sarah Breeden, deputy governor for financial stability at the Bank of England, says: 'We welcome the proposals the FCA have published as part of building the UK's stablecoin regime. For those stablecoins that expect to operate at systemic scale, the Bank of England will publish a complementary consultation paper later this year, including responding to industry feedback around allowing some return on backing assets. We continue to work closely with the FCA to ensure the integrity of the UK's stablecoin regime, including how firms transition within the regime.'
The FCA's proposals would require firms providing crypto custody services, who have responsibility for keeping consumers' crypto safe, to ensure they are effectively secured and can be easily accessed at any time. The proposals also seek to reduce the likelihood and impact of firm failures across regulated firms undertaking the activities of stablecoin issuance and cryptoasset custody.
The blurring of the lines between stablecoins and traditional financial markets has been emphasised in a new paper from the Bank for International Settlements.
The study found inflows into stablecoins reduce three-month US Treasury yields by 2-2.5 basis points within 10 days, while outflows can have a larger impact, raising yields by 6-8 basis points. The effects are concentrated in short-term Treasury securities, with limited to no spillovers to longer-term maturities.
Given its relative size, Tether (USDT) contributes the most to estimated effects, followed by Circle (USDC).
"These results suggest that stablecoins have already established themselves as significant players in Treasury markets. Their growth blurs the lines between cryptocurrency and traditional finance and carries implications for monetary policy, transparency of stablecoin reserves and financial stability - particularly during periods of market stress," say the report's authors.
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