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Stablecoins – how do you regulate an emerging ecosystem?

At a glance


  • The FCA and BoE have issued discussion papers on the future UK regulatory framework for stablecoins backed by fiat currency. The papers provide the core building blocks of the future rules for stablecoin issuers, custodians and systemic payment systems using stablecoins.
  • Stablecoins are currently mainly used to trade other digital assets, e.g. Bitcoin. However, the papers envision a future scenario where stablecoins may be used for wider retail payments. This enables financial services firms to start exploring potential future stablecoin use cases and investment choices. These include, for example, issuing a stablecoin to facilitate faster and cheaper cross-border retail payments.
  • As expected, the BoE will establish a robust regime for systemic stablecoin payment systems. As part of growth plans, stablecoin providers will need to balance the benefits of scale against the implications of being regulated as systemic by the BoE.
  • Although the proposals are high-level, it is already clear that the FCA regime will require significant compliance upgrades for existing stablecoin issuers. Proposals on the composition and safeguarding of backing assets and redemption processes will have significant operating model and revenue implications.
  • The PRA’s requirement that banks issue stablecoins from a separate legal entity – and the related governance, capital and liquidity requirements – will further challenge the business case for authorised UK banks exploring this space.
  • The detailed UK stablecoin regime will emerge in 2024. With compliance deadlines starting in 2025, attention will quickly turn to gap analysis, design and implementation work. Stablecoin issuers and custodians should start mapping out the areas of the proposals that will require significant operating model changes and consider the implications on their broader business offering and legal entity footprint, especially in the UK.



The UK regulatory framework for stablecoins is finally coming into focus. In November, the Financial Conduct Authority (FCA) and Bank of England (BoE) published their much-anticipated discussion papers outlining their future regimes.

Collectively the publications cover a lot of ground, including the high-level outlines of regimes for stablecoin issuers, custodians, but also systemic payment systems using stablecoins. Simultaneously, the Prudential Regulation Authority (PRA) set out its expectations of how banks should tackle the risks from new forms of private digital money, including both stablecoins and tokenised bank deposits.1

The publications do not amount to a comprehensive regulatory framework yet. After reflecting on feedback to the papers, more formal consultation papers will follow. However, if the core elements are ultimately adopted, stablecoin providers will have to prepare for a significantly different and stricter regulatory environment. In most cases, compliance with this framework will require significant changes to existing business models. However, the implications will vary depending on the type of activity – such as issuance vs. custody – and the type of firm involved – such as banks vs non-banks.

What are stablecoins?


Stablecoins are digital assets whose value is referenced to one or more underlying assets. There are four common variants: fiat-backed, commodity-linked, algorithmic and those backed by other digital assets.

The UK is taking a phased approach to digital assets regulation, focussing first on fiat-backed stablecoins – backed by a single fiat currency or pegged to a basket of currencies - given their potential to be used in retail payments. The published papers focus on this “Phase 1” category of stablecoins.

The second phase of the UK approach will focus on other stablecoins and unbacked digital assets (e.g., Bitcoin). Click here to read our detailed analysis on the UK’s phased regulatory approach.

Figure 1: UK stablecoin regulatory perimeter

There are some similarities between electronic money (e-money) and fiat-backed stablecoins under the future UK regime, especially their backing models. Nevertheless, there are two key differences. First, fiat-backed stablecoins are generally issued on distributed ledger technology (DLT), whereas existing e-money is typically issued on traditional systems. Meanwhile fiat-backed stablecoins is expected to have a secondary market – customers can trade tokens on exchanges. HMT is taking steps to ensure the legal separation of these products.2

Who is in the stablecoin ecosystem?


Stablecoin value chains vary depending on the specific use case, but typically involve stablecoin issuers, custodians, and exchanges. Currently, firms that specialise in digital asset markets – digital asset firms – generally fulfil all these roles. However, if stablecoins gain wider acceptance in retail payments, other financial services (FS) providers – such as banks or payment service providers (PSPs) – will likely also enter the ecosystem. 

Figure 2 sets out a very simplified illustrative diagram of how these entities may interact in one potential future stablecoin value chain. There are likely to be other intermediaries not explicitly shown below. 

Figure 2: Illustrative participants in a stablecoin ecosystem and an example of how they may interact

Source: Developed by Deloitte EMEA Centre for Regulatory Strategy, based on the FCA/BoE discussion papers

Overall UK regulatory approach to fiat-backed stablecoins


The FCA and BoE will both play important roles in the oversight of fiat-backed stablecoin markets:

As we explore below, in practice, some stablecoin firms may be dual regulated by both the FCA and BoE. The Payment Systems Regulator (PSR) may also oversee designated payment systems from a competition perspective.

The FCA and BoE discussion papers set out more details on the core pillars of their regimes, issuers, custodians and payment system operators.

Figure 3: Overview of key requirements for issuers, custodians and stablecoin payment system operators

Five key takeaways


1. In addition to requiring significant compliance investment, the FCA regime will have operating and revenue model implications for non-bank issuers


Becoming a fully regulated FS firm will require a shift in governance, risk management and compliance practices for issuers. But the specific proposals for backing assets composition; safeguarding; and redemptions will require significant changes to existing stablecoins.

  • Composition of backing assets – Certificates of deposits, money market funds, commercial paper and repurchase agreements would be ineligible under the new regime. Some prominent fiat-backed stablecoins today would need to make significant modifications to their backing assets and investment revenue models to comply with the proposals. 

  • Backing assets safeguarding regime – Heeding lessons learned in the e-money industry,3 reconciliations to ensure issuers are safeguarding the right value of backing assets will be a key supervisory focus area for stablecoin issuers. The choice of backing assets will affect the type of expertise required by stablecoin issuers, with those using government bonds needing to ensure they have the expertise to understand the impact of market price movements on their backing assets reserves. 

  • Redemptions – Currently, many stablecoin issuers restrict redemption to wholesale users like exchanges, rather than retail customers either directly or indirectly. If a stablecoin loses its peg, retail customers are often unable to redeem their stablecoin at par with the issuer and must instead trade in the secondary market. The FCA's proposals would prohibit such practices. While issuers can outsource operational elements of redemption processes, the legal redemption claim will remain with the issuer. 

2. Separate legal entity requirements will challenge the business case for authorised banks issuing stablecoins (and e-money?)


The PRA will mandate banks seeking to issue stablecoins to do so from a separate legal entity. Notably, the same restrictions will apply to the issuance of e-money. The rationale is to avoid confusion among retail customers regarding the different types of money and protections and minimise contagion risks. For example, the PRA wants to avoid retail customers assuming e-money or stablecoins have the same level of protection as bank deposits. However, there are significant costs associated with setting up separate legal entities and duplicating governance, risk management systems, capital and liquidity, and operations. 

These costs will raise questions about the business case for issuing a stablecoin. Banks have historically played a waiting game to understand the impact of regulation on a stablecoin offering. Open policy questions surrounding the launch and key features of a retail UK central bank digital currency (CBDC), and its interaction with other forms of money, will be important considerations in a bank’s decision to invest in infrastructure and capabilities necessary to offer stablecoin products. 

In addition, issuing e-money as a standalone business is becoming less attractive given increasing compliance costs.4 Although individual firms may be profitable, the median non-bank payments and e-money firm's profitability was essentially zero in August 2020, according to the FCA.5 Similar dynamics may apply to stablecoin markets, as the proposed regime is based on the e-money one, with some enhancements. The PRA’s legal entity requirement will reinforce banks’ cautious approach. 

As a result, banks may shift their focus towards the opportunities presented by tokenised deposits instead. These are deposit claims represented on DLT that enable novel techniques such as atomic settlement and smart contracts. These features may enable faster and more streamlined payment processes. While most initial exploration has focussed on wholesale transactions, banks are starting to turn their attention to retail applications as well.6

The PRA has made clear that tokenised bank deposits fall under the existing banking regime. Banks issuing tokenised deposits will need to do so in a way that meets the PRA’s rules for eligibility under the Financial Services Compensation Scheme (FSCS). In contrast, e-money is not covered by the FSCS, and the FCA proposes that fiat-backed stablecoins are also not covered.

3. Payment system operators and service providers will need to balance the benefits of scale vs. the implications of being regulated as systemic by the BoE 


If a payment system using stablecoins is designated as systemic by HMT, the operator7 will be subject to BoE oversight. The operator's responsibilities include managing the transfer function, i.e. recording transactions and transferring stablecoins between customers. In many cases, the payment system operator could be the stablecoin issuer. However, the operator could be a separate entity – stablecoin value chains are nascent, and business models and structures could vary.

The BoE’s systemic regime is designed to ensure that stablecoins used in systemic payment systems meet standards equivalent to those for commercial bank deposits. The BoE’s supervisory focus areas will include governance structures, risk management frameworks, capital and liquidity management, operational resilience practices and stress testing. While many of these areas are also part of the FCA regime, systemic stablecoins will be subject to more stringent regulatory requirements and oversight, reflecting the critical role that these systems play in the functioning of the financial system and the need to ensure their safety, efficiency, and resilience. 

Meanwhile the BoE will have extensive powers over stablecoin payment systems, including issuing principles and binding codes of practice, issuing directions for operators, and enforcement. This will likely enable the BoE to take a more proactive and nimble supervisory approach to stablecoin payment systems compared with other FS firms.

Three specific components of the BoE’s regime may affect the growth plans of stablecoin payment system operators. First, enhanced BoE requirements concerning backing assets and interest payments mean that direct payments fees will need to drive revenues. Second, although proposed holding limits may not affect individual retail customers at present, they may pose challenges for larger merchants if the stablecoin ecosystem expands. Third, as well as banks, the BoE may require non-bank payment firms and large technology firms to issue stablecoins used in systemic payment systems from a separate legal entity.

Against this backdrop, stablecoin payment system operators will need to carefully consider their growth plans and seek an optimal solution between scale, compliance burden, and revenues. 

Figure 4: Determining the optimum scale for a stablecoin arrangement 

Stablecoin payment system operators face an extra challenge in determining this optimal balance. HMT, in consultation with the BoE, will look holistically at various factors to decide if a stablecoin payment system is systemic. This means that steering clear of purely quantitative thresholds will not guarantee that they will not be classified as systemic. By contrast, the EU’s Markets in Cryptoassets Regulation (MiCAR) includes granular systemic thresholds, such as the average number and aggregate value of transactions per day passing 2.5m and EUR 500m respectively.

4. The UK’s plans to enable the use of overseas stablecoins for retail payments raises questions about their practical implementation


HMT proposes to regulate the use of fiat-backed stablecoins in UK retail payments under the PSRs 2017, including stablecoins issued overseas in certain scenarios. The FCA is exploring enabling firms to assess and approve the use of an overseas stablecoin in UK retail payments if it meets UK regulatory standards. However, this will likely be costly and complex to implement in practice. 

First, payment arrangers will need to monitor the overseas stablecoin on a weekly basis to ensure it remains compliant with UK standards. This necessitates implementing ongoing information-sharing arrangements with issuers. Second, payment arrangers would need to appoint an independent third-party to verify certain elements of their assessment, e.g., the adequacy of backing assets and arrangements to manage them.

Therefore, we expect firms will take a cautious approach to supporting the use of overseas stablecoins for UK retail payments.

5. The proposed custody regime may necessitate significant changes to stablecoin custody business models


Similarly for custodians, becoming a fully regulated FS firm will require a shift in governance, risk management and compliance practices. Reflecting recent digital asset market disruption, we expect a sharp supervisory focus on client asset protection and segregation from the firm’s own assets.

Two specific elements of the regime will require particular attention. First, digital asset exchanges may need to establish a separate legal entity for custody activities. Establishing specific, separate, governance structures, risk management systems, and sufficient financial resources will likely increase costs significantly. Meanwhile the data and technology lift to facilitate real-time reconciliations of each client’s stablecoin holdings would likely require significant resources.

What happens next?


While the FCA and BoE stablecoin proposals are high-level, a detailed UK regime will emerge in 2024. In the meantime, stablecoin issuers and custodians should start mapping out the areas of their business model that will require significant changes and consider the overall impact on their UK strategic choices. With compliance deadlines starting in 2025, their focus will quickly shift to detailed implementation work.

The role of the future of stablecoins in the payments ecosystem is yet to be determined. Regulation will undoubtedly play a key part in shaping that role.



1 Deposit claims represented on programmable ledgers that enable novel techniques such as atomic settlement and smart contracts.






7 In addition to regulating the operator, the BoE will regulate recognised service providers in light of the risks these providers pose to the functioning of the payment chain as a whole. These could include issuers, if separate from the payment system operator, and custodians.