AFME: UK proposals for stablecoins should incentivise DLT-based capital markets

09 February 2024

AFME is greatly concerned that the proposed custody rules would undermine the status quo for the provision of custody services, especially in wholesale markets. We therefore urge the UK Treasury and FCA to reconsider their proposals..

Commenting on the UK FCA and Bank of England consultations on the regulatory approach to stablecoins, which close today, James Kemp, Managing Director of Technology and Operations at the Association for Financial Markets in Europe (AFME), said: 

“The UK’s plan to bring stablecoins into the regulatory perimeter is a positive step towards creating a safe and sound system for cryptoassets, and towards promoting confidence in DLT-based capital markets. However, AFME has concerns around the proposed design of a number of the rules, which in their current form will have negative consequences for wholesale markets and participants.

“The FCA discussion paper goes beyond just regulating stablecoins, as it proposes enhanced rules in the custody of other types of cryptoassets, including those that currently meet the definition of specified investments. These instruments, which include security tokens, are inherently securities and should be treated as such throughout their lifecycle. To preserve market functioning, it is important that they are not subject to the separate regulatory treatment and territorial scope for custody proposed by the FCA.

“AFME is greatly concerned that the proposed custody rules would undermine the status quo for the provision of custody services, especially in wholesale markets. We therefore urge the UK Treasury and FCA to reconsider their proposals: changes are needed to enable UK wholesale institutions to optimally access and provide custody services in the growing markets of security tokens. Without such changes, the proposals would negatively impact UK investors’ market access, hamper the UK’s role as a fintech hub and challenge the growth of DLT-based capital markets in the UK.” 

Specifically, AFME suggests:  

• The territorial scope of regulated custody activities should not deviate from current market practice. We disagree with the proposed expanded territorial scope to capture relevant cryptoasset activities undertaken from outside of the UK. This proposed treatment would represent a significant departure from the way the territorial scope for regulated financial services activities (including the custody of security tokens) is currently determined under the UK framework.
• Cryptoassets qualifying as specified investments (including security tokens) should be treated as such throughout the regulatory framework and not be subject to a proposed separate regime for custody. The FCA’s approach to regulating the custody of cryptoassets should distinguish between the custody of  cryptoassets qualifying as specified investments (including security tokens) and the custody of other cryptoassets (including stablecoins). Existing FCA rules should be maintained for the custody of cryptoassets that meet the definition of specified investments (including security tokens) and tokenised deposits.
• To facilitate and incentivise the issuance of regulated stablecoins, the criteria for FCA-regulated and BoE-regulated stablecoins should not be overly restrictive. We view that the criteria for backing assets should be broadened beyond short-term government bonds and cash-deposits for FCA-regulated stablecoins and central bank deposits for BoE-regulated systemic stablecoins and should at a at a minimum include high-quality liquid assets....
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