FCA discussion paper advances UK stablecoin framework

The UK’s Financial Conduct Authority has stated that fiat-backed stablecoins used within the United Kingdom must comply with uniform standards. This directive applies irrespective of whether their issuers are UK-based or not, as emphasized in the FCA’s latest discussion paper released on Monday.

The FCA’s 109-page paper lays out the regulator’s general approach to stablecoins tied to fiat currencies, providing insight into how they might be applied to existing issuers such as Circle and Tether.

Circle (USDC) and Tether (USDT) together account for 87% of total stablecoin market cap, making them the “most widely used stablecoin exchanged and traded on UK exchanges,” according to the FCA.

The paper discusses the potential benefits of stablecoins “to deliver faster, cheaper, frictionless payments between consumers and merchants.”

“Differently from traditional [deliver vs payment] systems that usually require two days to be finalized, on-chain payments can be executed and settled almost simultaneously,” the paper adds. “This helps to eliminate counterparty-risk and possibly also enhance liquidity.”

However, the FCA also name-drops both Celsius and FTX as examples of crypto custody failures, highlighting the vulnerabilities in the system. Additionally, it references the temporary de-pegging of USDC in March, triggered by Silicon Valley Bank’s collapse, as a consumer risk that forthcoming policy should strive to address.

Stablecoin issuers will need to be authorized under the Regulated Activities Order (RAO) to issue fiat-backed stablecoins in or from the UK and comply with specific regulations and requirements set by the FCA. Similarly, custodians of such stablecoins will also fall under the same regulatory scope, ensuring they adhere to the standards established for custody activities within the RAO framework.

The UK Treasury released its formal proposals for regulating stablecoins and crypto assets a week ago. It previously invoked the concept of a “payment arranger,” licensed by the FCA. The role of this arranger would be “to assess overseas stablecoins against standards which are equivalent to those required for regulated stablecoins.”

For overseas issuers like Tether, the “gateway” to the UK market will be these regulated “payment arrangers.”

Blockworks reached out to Tether for comment on the provisions of the discussion paper. Paolo Ardoino, CEO of Tether, did not address specific questions, but stated that “the proposed regulations in the UK, while aimed at addressing risks, also present an opportunity to foster growth and modernize the financial system.”

One potential point of contention could be the FCA’s notion of a “right of redemption.”

“Most issuers of fiat-backed stablecoins restrict redemption to wholesale users such as exchanges — either directly, or indirectly, where restrictions (such as high fees or minimum withdrawal amounts) function as a deterrent,” the authors state.

“This leaves retail consumers only able to trade their stablecoins in the secondary market, should they wish to exchange their stablecoin for fiat,” it added.

Tether enforces a $100,000 minimum fiat withdrawal or deposit and charges a fee of $1,000 or 0.1% — whichever is greater — according to its fees page.

Redemption is only available to verified customers subject to a 150 USDT fee.

The FCA wants issuers to guarantee specific time frames within which users can redeem their coins for the underlying asset, suggesting that next business day service should become the norm.

UK policy is not to prohibit overseas stablecoins to be used for payments in the UK, and the paper acknowledges that competition “may bring benefits of greater consumer choice.” 

Adoption of stablecoins remains limited, the authors conclude.

“Outside of crypto asset exchanges where stablecoins are regularly used in trading pairs, crypto lending and staking services, and relatively specialist markets for digital goods; few merchants are willing to accept payment in stablecoin, and few consumers routinely hold it for the purpose of paying for goods and services.”

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