UK digital assets regulation progress too slow — stablecoin issuers  

The slow pace and changing nature of the UK Financial Conduct Authority’s (FCA) digital asset regulatory roadmap attracted almost universal criticism at a recent industry conference in London.  

Attendees at the Stablecoin Symposium were equally frustrated by the European Union’s Markets in Crypto-Assets regulation (MiCA) — deeming it “a mess” — as well as global regulators’ focus on the “singleness of money” idea.  

The FCA adjusted its roadmap for digital assets late last year, moving from a phased approach to one where stablecoins will be implemented using the same timetable as the rest of the regulatory regime for crypto assets. 

This “pivot” from a modular to a holistic approach has caused confusion for the UK market, said Laura Navaratnam, UK policy lead at Crypto Council for Innovation. 

While there were repeated calls from speakers for increased global regulatory clarity and market understanding, former regulator Navaratnam added that the industry had to provide central bodies with the necessary expertise and knowledge to move forward.  

“It is not the role of the regulator to be the smartest person in the room; it is their role to understand,” she said. “The industry needs to get the right information into the regulators.” 

Singleness stumbling block  

The singleness of money is the concept that all forms of money, physical or digital, should be valued on a one-to-one basis at all times and in all circumstances.

A recent thought leadership paper, Single Minded? Stablecoins and the singleness of money, discussed at length at the event, argues that an idealised and literal definition of the singleness of money could stifle the benefits of innovation from new types of money, such as fiat-referenced, regulated stablecoins. 

Around 99% of the stablecoin market is pegged to the US dollar, although in reality, stablecoins can be tied to any currency or liquid asset such as gold. However, they are frequently exchanged at a slight deviation from par with their referenced fiat currency.  

Last summer, the Bank of England noted: “As stablecoins operate today, they are mainly used as a settlement asset for transactions in crypto-asset markets. Current stablecoins do not meet the standards the Bank would expect were they to be used for payments more widely.” 

Regulatory bodies, such as the Bank for International Settlements (BIS), also argue that stablecoins currently circulate outside traditional payment systems and trade on secondary markets as bearer instruments, which means they can experience deviations from their pegged value and vary in purchasing power relative to their peg currency.  

The paper discussed at the event argues that singleness is not, as yet, a formal regulatory objective and did not feature explicitly in regulatory publications until recent years. It says recent debates over singleness — particularly with respect to its application to stablecoins — have tended to be binary: it is either met, or it isn’t. 

The authors say it is better to take a “more nuanced view” to differentiate between an idealised concept of singleness in theory and singleness in practice, making it better to view singleness as a spectrum rather than as a binary concept. 

Matthew Osbourne, policy director for EMEA at Ripple, said the debate over the singleness of money was a barrier to regulators “coming to the table” to provide clarity over stablecoins. “If a stablecoin is well run and backed by a liquid asset, it could be safer than fractional reserve banking. But regulators have a bias towards the status quo.” 

Osbourne argued there are three ways that stablecoin design can support the singleness of money. The first is that stablecoins are transparent and backed by stable fiat currencies or can be overcollateralised with a basket of currencies. The second is that the primary market for stablecoins reacts quickly to changes in demand, while the third way sees the secondary market provides liquidity, supporting arbitrage and minimising deviations from par.  

Regulators’ approach criticised  

Regulators were also criticised for evaluating the stablecoin sector from a worst-case scenario perspective rather than how the market is evolving in reality.  

“Regulators often start with the risk of de-pegging and go from there,” said Tom Rhodes, managing associate at Addleshaw Goddard and co-author of the paper. 

A de-peg occurs when the value of a stable asset strays significantly from its linked value. This can happen for various reasons, including liquidity problems, unfavorable market conditions, and regulatory crackdowns.  

Rhodes said regulators should regulate from a market behaviour perspective and how businesses would manage that risk. “[Regulators] think we are at the mercy of an exchange.” 

Navaratnam at the Crypto Council agreed, saying the regulators’ “search for singleness” is not aligned with “what is happening in the market right now”.  

Mike Ringer, partner and co-lead in the crypto and digital assets group at CMS, said a better way would be for central bodies to take a “holistic approach” to regulating stablecoins, looking at issuers, the first and secondary markets, and exchanges as a whole.

He described the recent MiCA regulation as “a mess”, despite being one of the first in the world to offer regulatory clarity — mainly because it took a modular, rather than a holistic, approach and equated the digital asset with e-money. He said he did not view stablecoins and e-money as the same thing. 

Stablecoin to rise  

The event discussed a rapid rise in the stablecoin sector that would impact various industry activities. Keynote speaker Simon Taylor, head of strategy and content at fraud, credit, and compliance platform Sardine, gave his thoughts on what was next for the market.  

This included the emergence of a new correspondent banking network that is less dependent on Swift and more about direct access. Stablecoins, meanwhile, would become a “layer” above local payment methods, in the same way that the internet is layered over local telecoms, he said. 

However, while Taylor also forecast the rise of payments companies and neo banks relying on stablecoin rails to operate globally, he warned that “the big UK banks will sit on their hands and do nothing: because that’s all they ever do”.