Shearman & Sterling LLP | FinReg | Bank of England Proposes Regulatory Regime for Systemic Payment Systems Using Stablecoins
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  • Bank of England Proposes Regulatory Regime for Systemic Payment Systems Using Stablecoins

    The Bank of England has published a discussion paper on its proposed approach to developing a regulatory regime for systemic payment systems using stablecoins and related service providers. The BoE’s paper follows the government’s recent Policy Paper on Plans for the Regulation of Fiat-backed Stablecoins which confirmed that these types of stablecoins will be brought into the U.K. regulatory perimeter.

    This is part of HM Treasury’s plan to regulate cryptoassets, focusing first on fiat-backed stablecoins. The BoE will be responsible for the financial stability of systemic payment systems using stablecoins. The Financial Conduct Authority will supervise non-systemic fiat backed stablecoins for prudential and conduct of business purposes, and systemic fiat-backed stablecoins for conduct purposes only, and has published a discussion paper alongside the BoE's discussion paper. Responses to both discussion papers may be submitted until February 6, 2024. The Prudential Regulation Authority will supervise banks' activities in tokenized deposits. The PRA has written to banks stating that any business in fiat-backed stablecoins will, among other things, need to be conducted from a separate legal entity under branding that is different to the bank' branding. The Payment Systems Regulator will supervise the competition aspects relating to systemic payment systems using fiat backed stablecoins.

    The BoE's remit will cover systemic payment systems using sterling-denominated stablecoins in retail payments, systemic service providers to payment systems using stablecoins and related service providers.

    Systemic Payment Systems

    The BoE proposes that the CPMI-IOSCO Principles for Financial Market Infrastructure would be used by the Bank in its approach to supervising systemic payment systems using fiat-backed stablecoins, together with its additional requirements covering three core functions within a payments chain: (i) issuance of stablecoins, including redemption of the stablecoins and management of the backing assets; (ii) the transfer function, including records of transactions, transfers of stablecoins and ownership rights; and (iii) store of value or exchange of value, usually provided by wallet providers and exchanges. All firms across the payment chain will need to comply with risk management, governance, operational resilience, third party outsourcing and failure management requirements.

    Among other things, the entity responsible for the transfer function and that acts as the payments systems operator would be responsible for assessing and controlling the risks across the entire payment chain; it would be the entity recognized by HM Treasury. The BoE is also proposing that any entity within a payment chain could be subject to a subsidiarization requirement. This would be to ensure adequate supervision of the U.K. services and that customers would be able to redeem their stablecoins. In particular, the BoE envisages requiring issuers of systemic payment stablecoins to establish U.K. subsidiaries to carry out business and issuance activities in the U.K. and with U.K. based consumers, both directly and through intermediaries. Both the issuer's capital and the backing assets would need to be held in the U.K.

    Other Service Providers

    Service providers that are critical to the delivery of the issuance, transfer and/or store of value functions, without directly performing them, may also come within the remit of the BoE, depending on the risks posed by their activities to the ability of a systemic payment system, to meet the BoE's regulatory expectations. Where a service provider also provides services to other regulated financial institutions, it could fall into the new regime, brought in by the Financial Services and Markets Act 2023, for critical third party providers under which HM Treasury is able to designate an entity as a "critical third party" if its failure would pose financial stability or confidence risk to the U.K. The BoE may otherwise recommend to HM Treasury that a service provider be specified as a critical service provider to a firm recognized in the systemic payment chain or recognized as a systemic service provider in its own right.

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