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European Markets Organization Cautions UK on Stablecoin Regulations and Securities

The United Kingdom has received cautious advice from European market organizations regarding stablecoin regulations and securities, as outlined in discussion papers released in November.

Originally, responses to the discussion papers on stablecoin regulation were due by February 6th. However, the Bank of England (BOE) extended the comment period on its paper until the morning of February 12th. The deadline for comments on the Financial Conduct Authority (FCA) discussion paper remained February 6th, with the Association for Financial Markets in Europe (AFME) submitting comments to the FCA on time.

The discussion papers, released as part of a joint publication package on November 6th, were viewed as the initial step in comprehensive crypto-asset regulation. While thematically linked, the papers approached the topic from different perspectives.

The BOE primarily addressed issues concerning the use of a sterling-backed retail-focused stablecoin in systemic payment systems, focusing on transfer functions and requirements for wallet providers. In contrast, the FCA discussion paper explored various stablecoin use cases and delved into auditing, reporting, prudential requirements, and custodianship. The principle of “same risk, same regulator outcome” was emphasized.

The FCA will regulate custodianship, with the possibility of the BOE adding requirements in specific cases such as off-chain transactions and Anti-Money Laundering and Know Your Customer requirements for unhosted wallets. Services that could be systemic or provide essential services to systemic payment systems using stablecoins or recognized stablecoin service providers may also face dual regulation.

James Kemp, AFME’s managing director of technology and operations, commended the UK proposals as a positive step. However, he expressed concerns about the treatment of securities tokens, stating that security tokens should be considered securities throughout their lifecycle to maintain market functioning.

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Kemp suggested that the FCA postpone aspects of the proposal relating to stablecoins issued overseas until international frameworks and mature markets are established abroad.

Stablecoin regulations are anticipated to be implemented in the UK by 2025.