The FCA’s approach to regulating cryptoassets and stablecoins

On this day in 1922, Howard Carter became the first to enter the tomb of King Tutankhamun.

He couldn’t see much, at first – he’d made a small hole in the door and had to peer through it using a torch. But it was enough for him to see something.

People were divided on what happened when Carter opened the door.

Some saw history being brought to life. Others believed it unleashed a curse.

It sometimes feels that, with cryptoassets and stablecoins, we are standing at the same type of door. 

We saw the first glint of what was to come in 1990 with the launch of eCash. It hinted at a something that would define an age – the Carter moment for digital money, if you will.

Less than 20 years later, Bitcoin flung the door wide open as the first true cryptoasset.
And, like the one to Tut’s tomb, the door has stayed open. 

Today, cryptoassets and stablecoins are moving towards being mainstream. 

Over 90% of people in the UK have heard about crypto, and roughly seven million currently own or have owned[3] it at an average of just over £1,800[4]. 

Again, we find ourselves with two distinct schools of thought: One that believes we’re on the precipice of something great. Some have even called Bitcoin 21st-century gold[5].

And another that sees an inherent danger in cryptocurrency due to its high volatility (as we are seeing again this week), difficulty in determining value and security risks. 

It’s true that crypto is currently largely unregulated in the UK and carries high levels of risk. 

But we also know that crypto is a broad term that encompasses a number of applications and use cases. For example, many would contend that stablecoins could bolster UK growth and competitiveness.

I’m no Howard Carter, but I think there is a way to keep the door open and ensure consumers remain safe – supported by balanced and appropriate regulation. 

We already supervise cryptoasset businesses for anti-money laundering, counter-terrorist financing and financial promotions.

Now, we find ourselves at a crossroads as the government works to bring crypto into our perimeter.

Our philosophy and approach

We want the UK’s crypto and stablecoin market to be one that is[6] well-balanced, enables innovation and is underpinned by integrity and trust. 

While we are reliant on legislation to bring this to life, we are working at pace to build a proportionate, sustainable regime that works. 

One that is competitive, built for the future and ready for firms – and that allows consumers to make informed decisions and understand both what they are getting into and the limits of consumer protection. 

We also want to foster an environment that firms want to do business in. Because there is huge potential in serving and being part of the UK’s well-established financial services market. 

From the start, our approach has been deliberate, with a clear roadmap and timetable.

We have prioritised working with industry and listening to feedback to make sure we get this right. 

That’s why we published a series of discussion papers to explore the issues and to elicit the full range of views before consulting on specific proposals.

We have now published a substantial consultation on stablecoin issuance and cryptoasset custody, a prudential regime and cross-cutting requirements.

There is still more to come, on market abuse, admissions and disclosure, and prudential and regulated activities. By early next year, we expect to have another consultation paper on consumer duty, regulatory reporting and more.

After taking the feedback into account, we’ll publish policy statements to set out the final regime before opening our gateway to firms.

In that vein, we are actively seeking views. 

We want firms to engage with us as we make these important decisions. If our proposals don’t work, let us know – and propose new solutions for us to consider. 

Because, contrary to some commentary, we want our regulation to facilitate growth, not stifle it. 

We’re also actively supporting innovation in crypto, including stablecoins.

For example, we shared yesterday that RegTech platform Eunice has joined our Regulatory Sandbox[7] to explore how disclosure templates will boost transparency for cryptoasset investors.

Eunice is seeking input from industry to help consumers understand what they’re investing in. The results of the sandbox will influence how we approach disclosure requirements, and we'll then feed those insights into our wider work on admissions and disclosures.

And we are announcing today the launch of a stablecoin-specific cohort in our Regulatory Sandbox. It will support stablecoin issuers in testing UK-issued stablecoins, while also helping us test our policy proposals in an agile fashion. It’s a unique chance for innovative firms to test their stablecoin products and services under the UK’s evolving regulatory regime, potentially driving new ideas to benefit both wholesale and retail customers.

This truly is a very exciting and groundbreaking initiative.

It supports agile policymaking and industry development, and gives firms the unique opportunity to provide us with practical feedback. 

Applications open to firms today and run until 18 January. And to show our intent, we have our first successful entry. A major firm has been accepted and is gearing up for testing in the next couple of months. We will support them as they test their GBP stablecoin for payments in another world first. 

This demonstrates our commitment to helping firms test, grow and thrive in the UK.

We look forward to further applications to participate in the cohort, and you can find more details on how to apply on our Regulatory Sandbox webpage[8].

Finally, I am pleased to announce we will be hosting in-person stablecoin policy sprints in March.

These sprints will further consider retail and wholesale use cases for stablecoins, and help determine where regulation is or is not needed. 

We want to bring together participants from traditional finance and payment and fintech firms to explore how stablecoins can improve trust, speed, cost and interoperability across different use cases. 

Expressions of interest for the sprints will open in January, so keep an eye out for more details.

A change in tack

This market is unlike any other, and we don’t have all the answers yet.

Whilst we strive for the internationally agreed upon principle of ‘same risk, same regulation,’ it is clear that a ‘lift and shift’ of traditional rules won’t work for the complexity and challenges we are facing. 

For example, decentralised cryptoassets make compliance with some disclosure and due diligence requirements more difficult.

There is also greater legal uncertainty over cryptoasset ownership and location compared to traditional finance. With most UK consumers using overseas cryptoasset platforms, there is an increased risk of harm if the firms become insolvent. 

And distributed ledger technology does not provide a central authority for firms to have contractual relationships with. 

Which is why we are proposing to extend our operational resilience framework to cover all cryptoasset firms, similar to banks. This will ensure they meet consistent operational resilience standards – which is crucial, given the market’s reliance on technology.

With these things in mind, we are tweaking our rules and developing new approaches where needed. 

We’re also considering where we might apply different approaches to wholesale firms than those directly serving consumers.

But we do know that while we need to rebalance risk appropriately to stay innovative and competitive, we cannot do so at the expense of appropriate customer protection.

Transparency is critical. Proper information on what investors stand to gain – and the risks they face – must remain in place. 

Some say risk warnings put consumers off investing in crypto. We say they help them make more informed decisions.

We are also considering developments in the market outside of our crypto roadmap and continue to have open discussions with industry about our policies. 

The rules we will finalise next year will be strong and clear – and serve as the foundation of our regime. 

They’re what we will build upon to create the market we want to see: one that inspires confidence, enables innovation and adequately protects everyone involved. 

In other words, a clean market that drives global standards.

If that’s the kind of market you want to run, to you I say: we are open for business.

Here to help

And we are here to help you set up shop.

To ensure you are ready for the regime. 

To help you understand our rules and know how to comply with them, and assess whether your own governance is in order and you have the right functions and resources. 

Because once the regime is in place, you will need to be authorised by us to do business in the UK, and you will need to demonstrate that you can meet the standards we set. 

We recognise that many of you may be new to regulation and could need help to navigate our rules and the regime itself.

We want you to be as prepared as possible to understand our regime and submit a successful application. 

As we get closer to the gateway opening, I encourage you to take advantage of the targeted support we offer in our free pre-application meetings. It’s a chance to get initial, informal feedback on your plans. 

Starting at the beginning of next year, you can expect to hear frequently from us on our standards and expectations, and how you can demonstrate that you meet them.

A global approach

As you prepare for the regime, we will continue to ensure it is one that is proportionate and innovative.

The Bank of England’s recent consultation on systemic payments using stablecoins is an important next step. We will continue to work closely with the Bank to develop a smooth transition from one regime to the other and ensure a coordinated approach.

But cryptoassets and stablecoin markets are global, not just UK-focused.

That’s why we are working with and learning from our international partners and speaking directly with our fellow regulators to better understand what others are doing.

This includes playing a leading role in the International Organization of Securities Commissions[9], the Financial Stability Board[10] and the Financial Action Task Force[11].

We are also heading up the Transatlantic Taskforce for Markets of the Future, in partnership with the United States.

It will give our countries the chance to do two things.

One, consider ways to collaborate on digital assets while both countries develop legislation and regulatory regimes.

And two, improve links between our markets and boost growth and competitiveness.

I would be remiss not to touch on the GENIUS (Guiding and Establishing National Innovation for US Stablecoins) Act.

Some commentators say we are behind the US. In my view, we aren’t.

We have consulted on regulatory requirements for stablecoin issuers and prudential requirements that clarify what is expected of firms – thus providing more detail than legislation alone can.

Conclusion

But remember, we are just beginning, and things will continue to evolve.

For example, there was one thing that Howard Carter wouldn’t have found in King Tut’s tomb: money.

Throughout most of ancient Egypt’s history, the economy operated on a barter system in which they paid each other with bread[12] and beer[13]. Not bad for a hard day’s work, if you ask me.

Coins wouldn’t come into circulation for another 800 years[14] or so after Tut’s death.

So, let this serve as a reminder that what we think of as ‘money’ doesn’t have to be fixed.

And that innovation in money is nothing new.

As we move forward, we must ensure that we have the regulation in place to allow for this innovation.

That we can deliver the National Payments Vision[15], and work alongside other developments in money – like stablecoins, open banking, tokenised deposits and potentially central bank digital currency.

And that we can do it while keeping our systems and market trusted, resilient and ready for whatever comes next.

If you would like us to contact you with information about cryptoasset publications, events and other relevant material, please register your interest here[16].