Cross-authority roadmap on innovation in payments

Following the publication of two discussion papers, one by the Financial Conduct Authority (FCA) and one by the Prudential Regulation Authority (PRA), about a new supervisory regime for issuers, distributors, and custodians of stablecoins (EventID 23724 and EventID 23817) and a related Dear CEO Letter (EventID 23820) about regulatory expectations of UK depository institutions when engaging in digital money deposit-taking or issuance, the two regulators have now published a final roadmap in this context. In this „document“, the PRA and FCA
– present the key differences in digital money and money services involving E-money, stablecoins, and tokenized bank deposits,
– explain which regulator is responsible for each and expected to be responsible in the future, and
– outline the timetable they envision to implement a new regulatory regime for stablecoins.
Each issue is briefly described below:
### E-money, stablecoins, and tokenized bank deposits – key differences and regulatory remit
(1) E-money: E-money is a digital form of currency used for online transactions or payments and are therefore considered „money-like instruments“. Historically, e-money has only been used for payment only, but recent trends show an increased use of e-money for saving purposes. Therefore, e-money has become a serious alternative to „traditional“ savings products offered by commercial banks.
E-money institutions are currently regulated by the FCA. However, there’s an ongoing plan to revise the e-money regulatory framework to enhance consumer protection and improve firm resilience. The Bank of England’s Financial Policy Committee (FPC) has indicated that the current regime might not suffice if e-money is widely used for payments at a systemic level. Consequently, there’s a possibility that the Bank might regulate e-money institutions that pose systemic risks in the future. Corresponding regulatory efforts are underway to expand the Bank’s regulatory scope to cover such firms
(2) Stablecoins: Stablecoins are digital assets which aim to maintain a stable value relative to a fiat currency. They are often backed by variable-value assets, including cryptoassets. Initially prevalent in cryptoasset markets for a means of payment for cryptoassets, well-regulated stablecoins may potentially become a common method for everyday payments among UK residents.
Recent legislative changes empower the HM Treasury and the PRA and FCA to oversee firms offering new tokenized digital money like stablecoins. Currently, they are not under the supervisory remit of either one. Following the introduction of a new supervisory regime as outlined in the above noted discussion papers, the FCA will regulate UK-based issuers and custodians of stablecoins for prudential and conduct purposes at a non-systemic scale, ensuring these stablecoins meet prescribed standards for payments. The Bank of England will regulate firms issuing stablecoins expected for widespread everyday payments (systemic scale), ensuring equivalent standards to bank deposits but without backstop arrangements like deposit protection. Dual regulation may apply to some firms as outlined in the roadmap.
(3) Tokenized bank deposits: Tokenized bank deposits refer to the representation of traditional bank deposits in a digital, tokenized form on a blockchain or a programmable ledger. Many banks are currently exploring the issuance of bank deposits in tokenized form, as it enables, for instance, the use of smart contracts which themselves are self-executing contracts with the terms of the agreement directly written into code and automatically executed when these terms have been met.
Banks handling tokenized deposits remain under the regulatory purview of the PRA for prudential oversight and the FCA for conduct regulation. As noted in the beforementioned CEO letter, the PRA expects that banks offer tokenized money to retail customers only as protected deposits. If banks aim to issue e-money or stablecoins, they are expected to establish separate, insolvency-protected entities with distinct branding and legal structures to prevent adverse impacts on the operation of a banking group. These entities would be regulated under e-money or stablecoin regimes alongside existing banking regulations at the group level.
### Timetable for a new regulatory regime for stablecoins
– In the first half of 2024, the regulators will assess the responses they will have received to their discussion papers;
– In the second half of 2024, they will finalize corresponding rules which will again be open for public consultation; and
– In 2025, they seek to implement the new regulatory regime for stablecoins.