The Financial Conduct Authority (FCA) maintains a warning list of financial companies that operate without a license. The warning list is designed to protect consumers from financial scams and to promote market integrity
IMF CBDC Updates
The IMF’s reports on CBDCs are an important source of information and analysis on this emerging topic. IMF has also published a number of other papers and articles on CBDCs.
Draught regulations for stablecoins are released by the Bank of England and the FCA.
08 November, 2023
The Bank of England and the Financial Conduct Authority (FCA) have released proposals soliciting feedback on their intended regulatory framework for stablecoins, explicitly targeting any potential future payment systems using stablecoins on a systemic scale within the UK.
Stablecoins represent a novel form of digital asset designed to maintain a stable value and could be utilised for retail payments. The regulatory approach outlined by the FCA and the Bank aims to leverage the potential advantages of stablecoins, notably in facilitating faster and more cost-effective payments. Simultaneously, these proposals aim to ensure consumer protection, combat money laundering, and uphold financial stability.
The FCA’s Discussion Paper delves into the proposed regulation encompassing the issuance and custody of stablecoins that assert stability by holding assets denominated in a fiat currency.
Conversely, the Bank’s Discussion Paper details its regulatory stance towards operators of systemic payment systems employing stablecoins. These are payment systems that, if extensively employed for retail transactions in the UK, pose risks to the financial system’s stability. The Bank also seeks to regulate other entities, such as stablecoin issuers and wallet providers, whose involvement may pose financial stability risks to these payment systems.
Sheldon Mills from the FCA emphasises the potential of stablecoins to revolutionise payments, aiming to develop rules that benefit consumers and firms while aligning with regulatory objectives. Sarah Breeden, the Bank of England’s Deputy Governor for Financial Stability, underscores the importance of robust regulation to support innovation in digital retail payments.
The FCA and the Bank invite feedback from the public and industry stakeholders until February 6, 2024.
Furthermore, the Prudential Regulatory Authority (PRA) has issued a communication addressing deposit-takers, highlighting the risks stemming from the issuance of various forms of digital money while acknowledging the potential benefits of innovation in this domain. This communication outlines the PRA’s broader expectations from banks concerning their utilisation of digital money, emphasising areas such as operational resilience, anti-money laundering measures, counter-terrorist financing, liquidity, and funding risks.
Additionally, a cross-authority roadmap paper has been published, illustrating how the current and proposed regulatory frameworks of UK authorities for issuers of digital money will interact.
While discussing these advancements, the FCA remains steadfast in cautioning individuals about the risks associated with crypto assets, including stablecoins, emphasizing their largely unregulated nature and the absence of protections in case of unforeseen complications.
References:
https://www.bankofengland.co.uk/news/2023/november/fca-and-bank-of-england-publish-proposals-for-regulating-stablecoins
https://www.lexology.com/library/detail.aspx?g=194867b9-b766-4246-bc11-4e5d6c6fcbaf
https://www.fca.org.uk/publication/discussion/dp23-4.pdf
Crypto asset Regulation: Stable coins
In summary, the UK government proposes a regulatory framework for stablecoins, specifically focusing on fiat-backed stablecoins, to ensure consumer protection, mitigate risks, and maintain financial stability. The regulatory landscape involves coordination among the Bank of England, the Payment Systems Regulator (PSR), the BOE, and the FCA. Here are the key points:
1. Regulatory Oversight:
minimise The Bank of England, FCA, and PSR will regulate fiat-backed stablecoins to minimize customer harm and address conduct, prudential, and financial stability risks. – Regulators will work together to create a coherent framework, avoiding regulatory overlaps.
2. FCA’s Regime:
HM Treasury aims to regulate fiat-backed stablecoins in two ways: regulating their use in payment chains and regulating activities related to issuance and custody, irrespective of their purpose (e.g., payments, store of value, or settlement asset).
Legislation will define fiat-backed stablecoins as those maintaining a stable value by referencing and holding a fiat currency as backing.
3. Regulation through Legislation:
The usage of fiat-backed stablecoins in payment chains will be governed by changes to the Payment Services Regulations 2017 (PSRs 2017).
The Order of 2001 (RAO) for Regulated Activities, according to the 2000 Financial Services and Markets Act, will cover the activities of issuance and custody of UK-issued fiat-backed stablecoins.
4. Authorization and Standards:
– Firms conducting issuance or custody activities must adhere to FCA rules and guidance.
– Overseas stablecoins used in UK payments may be accommodated, with the possibility of FCA authorization for the payment arranger ensuring compliance with UK standards.
5. Scope and Exclusions:
The regulatory regime will not cover stablecoins used in buying and selling cryptoassets on exchanges until the wider regime for cryptoassets is implemented in phase 2.
Other stablecoins (non-fiat-backed) and unbacked cryptoassets used in payment chains will remain unregulated.
6. Future Regulation (Phase 2):
The proposed regime will remain in place when the wider regime for cryptoasset regulation is introduced in phase 2.
The custody activity in the RAO will expand to cover a broader category of crypto-assets, and new regulated activities, such as operating a crypto-asset trading venue, will be introduced.
7. Bank of England’s Role:
The authority will rest with the Bank of England to regulate systemic Distributed Ledger Technology (DLT) payment systems and service providers, including those using stablecoins.
The PSR will have similar powers for DLT payment systems, contingent on HM Treasury recognition or designation.
In conclusion, the proposed regulatory framework seeks to address the specific risks associated with stable coins, provide clarity for consumers, and pave the way for a thorough regulatory framework for crypto-assets in the future.
UNDP, MAS, and Collaborators Introduce Universal Trusted Credentials Project to Enhance MSME Financing
The UTC initiative aims to establish a structure for generating reliable credentials that assess the financial credibility of micro, small, and medium enterprises (MSMEs). This framework utilizes both conventional and non-traditional data sets to determine the worthiness of MSMEs for financing purposes. By incorporating a wide range of data sources, the UTC initiative provides a more comprehensive evaluation of an MSME’s financial standing, enabling lenders to make informed decisions regarding their financing options. This approach helps bridge the information gap and enhances the accessibility of funding for MSMEs, ultimately fostering their growth and development in the financial market.
Collaboration between International Finance Corporation, Monetary Authority of Singapore, and World Economic Forum to Promote Digital Inclusion in Emerging and Developing Markets
The partnership aims to improve access to digital services for underserved individuals, communities, and MSMEs by mobilizing financing. This will be achieved through the collaboration of financial institutions and FinTech companies. The goal is to make these services more affordable and accessible, ensuring that everyone has the opportunity to benefit from digital advancements. By working together, the partnership hopes to address the financial barriers that often prevent marginalized groups from accessing digital services, ultimately promoting inclusivity and equality in the digital sphere.
UNDP, MAS, and Collaborators Introduce Universal Trusted Credentials Program to Support MSME Financing
The UTC initiative aims to establish a standardized framework for determining the financial credibility of micro, small, and medium enterprises (MSMEs). This framework would rely on a combination of traditional and alternative data sets to assess an MSME’s financing worthiness. By incorporating both traditional financial data and non-traditional sources of information, such as social media activity or online reviews, the UTC initiative seeks to provide a comprehensive evaluation of an MSME’s creditworthiness. This approach would enable lenders and financial institutions to make more informed decisions when providing financing options to MSMEs, ultimately promoting greater access to capital for these businesses.
IFC, Monetary Authority of Singapore, and World Economic Forum Join Forces to Enhance Digital Inclusion in Emerging and Developing Economies
The partnership aims to enhance accessibility and affordability of digital services for underserved individuals and communities, as well as MSMEs. This will be achieved through the collaboration of financial institutions, FinTech companies, and other stakeholders. The focus will be on exploring innovative ways to mobilize financing and facilitate the adoption of digital services. By leveraging the expertise and resources of the involved parties, the partnership aims to bridge the digital divide and empower underserved populations to benefit from the advantages of digital technologies.
Key strategic focus areas of CPMI and its impact on enhancing cross-border payments
The CPMI’s work programme covers a variety of topics that require joint effort and coordination with international bodies such as the International Organization of Securities Commissions (IOSCO) and the Financial Stability Board (FSB). The programme is divided into three floors. The ground floor focuses on the risk management of financial market infrastructures (FMIs) and includes the implementation of standards, resilience and recovery of central counterparties (CCPs), margining practices in centrally cleared markets, and cyber and operational resilience of FMIs. On the first floor, we have the G20 cross-border payments programme, which aims to enhance cross-border payments by addressing challenges such as high cost, low speed, poor transparency, and limited access. The top floor is dedicated to digital innovation and the future of payments, with a focus on tokenized financial ecosystems and the design of central bank digital currencies (CBDCs).
Mandala Project: Revolutionizing Compliance in Cross-Border Payment Systems
Project Mandala is a BIS Innovation Hub initiative that aims to address the challenges of cross-border payments compliance. The project explores the feasibility of encoding jurisdiction-specific policy and regulatory requirements into a common protocol for various cross-border transactions, including borrowing, foreign direct investment, and payments. The existence of disparate policy and regulatory frameworks between different jurisdictions is a major obstacle to smooth and efficient cross-border payments. These differences contribute to the regulatory compliance burden, increase transaction time, and introduce uncertainties among stakeholders. Project Mandala, led by BISIH Singapore Centre, the Reserve Bank of Australia, the Bank of Korea, the Central Bank of Malaysia, and the Monetary Authority of Singapore, seeks to automate compliance procedures, provide real-time transaction monitoring, and increase transparency and visibility around country-specific policies. The project aims to create a compliance-by-design architecture that can enable more efficient cross-border transfers of digital assets, including central bank digital currencies (CBDCs) and tokenized deposits. It could also serve as a foundational compliance layer for legacy and emerging wholesale or retail payment systems. The measures implemented could include foreign exchange rules, as well as anti-money laundering and countering the financing of terrorism (AML/CFT) measures. Project Mandala aligns with the Financial Stability Board’s 2023 priority actions for enhancing cross-border payments and aims to promote an efficient legal, regulatory, and supervisory environment while maintaining safety, security, and integrity. In an interim project update, Project Mandala has developed a use case that focuses on cross-border lending from Singapore to Malaysia. The team is exploring technological solutions that enable concurrent sanctions screening and compliance checks during the pre-validation phase. A common protocol is used to query the required checks for the lending transaction and generate a proof of policy and regulatory compliance, which can be attached to the settlement asset. This approach aims to simplify compliance procedures and expedite the overall payment process.