# Response to FCA DP23/4 Regulating cryptoassets Phase 1: Stablecoins

The FCA published a [discussion paper](https://www.fca.org.uk/publications/discussion-papers/dp23-4-regulating-cryptoassets-phase-1-stablecoins) regarding possible approaches to regulating UK stablecoins. This is an effort in tandem with the [Bank of England](https://hackmd.io/@SteakhouseFi/boe-2023-stablecoin) consultation that we responded to a few months ago.

We are making available a [Google Doc version](https://docs.google.com/document/d/1rWOplANsoPvKEuwMhY_ZZDbeWIjlFf_RXR6ZTmMRcuo/edit) of the paper here for easier navigation and browsing, as the PDF version is not accessibility-friendly and is difficult to navigate.

We're responding to the FCA Discussion Paper on a proposed regulatory framework for stablecoins. While the Bank of England's intention is to define fiat-backed stablecoins in legislation, the FCA's focus has been to define the regulatory parameters for fiat-backed stbalecoins.

Other than delight at seeing government agencies describe their own currencies as 'fiat', we should also take these opportunities to make good faith efforts to advance our own perspectives on the matter.

Steakhouse Financial is the leading finance and strategy consultancy for decentralized finance projects, with unique expertise in stablecoins. Our clients include [MakerDAO](https://makerdao.com/) (DAI), [Lido](https://lido.fi) (stETH), [Mountain Protocol](https://mountainprotocol.com/) (USDM), [Angle](https://angle.money/) (agEUR), [Venus Protocol](https://venus.io/) (VAI) and others. We are thought leaders in the space with contributions like [Real-time Risk Metrics for Programmatic Stablecoin Crypto Asset-Liability Management](https://arxiv.org/abs/2401.13399), the [Risk Management for DeFi Protocols](https://www.steakhouse.financial/projects/risk-management-framework-for-defi-protocols) and the [Operating Manuel for Decentralized Stablecoins](https://www.steakhouse.financial/projects/stablecoin-manual)

In brief, our views are quite straightforward:

- Stablecoins are an important and innovative new product that merits a new approach rather than forcing them into existing buckets
- Allowing more innovation at this stage is more important than getting the specific framework exactly right
- Allowing interest-bearing stablecoins is a no-brainer for inciting more competition and allowing differentiation in the market
- Preserving singleness of money might entail allowing issuers to deposit balances at the central bank

We believe stablecoins have enormous potential in reducing fee extraction, increasing consumer welfare and improving macroprudential outcomes through greater transparency. Those features of stablecoins must be allowed to evolve positively in a rational and data-driven regulatory approach.

Below are our answers in full-detail. Your comments on these are welcome of course and we would encourage your comments both on this note as well as to the FCA directly.

## What is the name of your organisation?

Steakhouse Financial Limited (KY)

## What industry/sector is your organisation part of?

Consultancy

## Chapter 1: Overview

The paper correctly notes the interconnectedness of stablecoins with the traditional financial system. They are a new ‘variety’ of money, akin to tokenized bank deposits, and function in similar ways but offer a few notable benefits. The ability to redeem at par and on demand should be the most important objective for a fiat-backed stablecoin from a risk management perspective. The example provided for USDC in March 2023 is relevant for secondary market redemption rates, but illustrates a different point. Namely, that stablecoins, as tokenized bank deposits with a public market price, may deviate from par while trading. This is no different to an electronic transaction at a merchant clearing under par to charge a fee if a customer uses a different card network to the acquirer bank for the merchant, or an exchange rate desk charges a spread to settle FX. In this regard the specific example of USDC trading at $0.12 at Bitstamp is poorly researched and not appropriate for being cited.

The use of stablecoins as money laundering instruments is overstated, and research suggesting otherwise is regularly debunked or toned down with post-fact analysis. By design, stablecoins are in fact wholly unsuitable for criminal or illicit activity, as all of the transaction activity takes place on public blockchains with open account histories and balances. Tracking and identifying pseudonymous addresses has evolved from an art to a science and stablecoin issuers cooperate extensively with law enforcement authorities to freeze and sanction assets where relevant.

Judging by the amount of criminal activity that does not take place on stablecoins today, one surmises that money launderers and criminals do in fact seek to be exposed to the traditional financial system. Suggesting that criminals could ‘offramp’ stablecoins to fiat currency proves this point precisely.

## Chapter 2: A new stablecoin regime

### Q1: Should the proposed regime differentiate between issuers of regulated stablecoins used for wholesale purposes and those used for retail purposes? If so, please explain how.

The example of the USDC secondary exchange rate in March 2023 is relevant for this point. Creating two-tiered systems of tokenized bank deposits, or three-tiered systems of wholesale tokenized bank deposits, retail bank deposits and stablecoins, risks a few bad outcomes:

Blocking off retail users from the redemption window and artificially constraining them to rely on secondary liquidity introduces new risks for consumers. Redemption windows should be open for all stablecoin users and consequently, hence their design does not need to be substantially different from wholesale users.

Commercial banks are able to offer services to SMEs and to retailer consumers alike. The protections that are available to each type of account are in fact common, even if the risk disclosure requirements may well be different. The bank balance sheet is, ultimately, consolidated across both user types.

In conclusion: To avoid unintended negative outcomes, the proposed regime should not make a distinction between wholesale and retail stablecoins. Moreover, it should also not create a secondary class of ‘tokenized bank deposits’ that shelters the incumbent commercial banking industry, but instead allow stablecoins to compete fairly for deposits.

### Q2: Do you agree with our assessment of the type of costs (both direct and indirect) which may materialise as a result of our proposed regime? Are there other types of costs we should consider?

The level playing field that the FCA seeks already in-fact exists. To wit, all of the large centralised stablecoin issuers at the moment have emerged from outside the traditional financial industry. New challengers are constantly emerging, competing on new dimensions such as transparency on the backing, different regulatory or supervisory frameworks under scope, interest rates, channel partner deals, and so forth. Enforcing too high a level of direct compliance costs on the industry will have the expected effect of closing off this sector of the financial services industry to newcomers and entrench incumbents.

### Q3: Do you agree with our assessment above, and throughout this DP, that benefits, including cheaper settlement of payment transactions, reduced consumer harm, reduced uncertainty, increased competition, could materialise from regulating fiat-backed stablecoins as a means of payment? Are there other benefits which we have not identified?

The DP is approaching stablecoins from the perspective of regulation being the key unblocker to untold consumer benefits. The converse is in fact the case. The absence of regulation has allowed a new type of financial instrument to flourish, which already provides extensive benefits to its users – limited though their adoption may be.

Stablecoins can be used and are being used today in some of the ‘future use cases’ outlined, including merchant settlement, remittances and tokenized clearing. For instance, a suitably identified and accredited investor can purchase tokenized securities in full compliance with Swiss law and settle the transaction using stablecoins. The value of these tokenized securities issued compliantly and entirely on-chain is in the order of $500m to-date. The evolution of this market can be followed on this public dashboard: https://dune.com/steakhouse/tokenized-securities.

The benefits that could materialise from regulation include bringing GBP stablecoins into money singleness with bank deposits. The benefits of this include greater supervisory access to centralised stablecoin issuers. However, enforcing stablecoins into a ‘e-money token’ or ‘payment token’ framework is also unsuitable and carries some amount of welfare capture for industry participants at the expense of users.

Stablecoins are not ‘primarily’ a payment method or ‘primarily’ a fund. Enforcing single use-cases on the grounds that stablecoins are 'mostly for payment' is not congruent with their technical capabilities or, indeed, their use in-action. At time of writing, on Ethereum only, $14bn of USDC, $25bn of USDT and $2.7bn of DAI were simply sitting on user wallets without moving. Reference: https://dune.com/steakhouse/stablecoins.

Entrenching this will basically nominate a few market winners and cement an unassailable monopoly situation in the future. Stablecoins should be allowed to compete on multiple angles, including offering an interest-rate. That this makes them more like financial products than payment products is an illustration of the need for a new approach to regulation.

User-rewarding stablecoins such as USDM (Mountain Protocol), a fiat-backed and fully licensed stablecoin that pays a loyalty reward rate close to the US Federal Funds rate, are equally useful as payment tokens relative to USDC but are also capable of passing through a significant portion of the risk-free asset rate backing the collateral. This rate is bound to fluctuate over time but the underlying stablecoin is designed to always redeem at $1. There is no benefit in raising barriers to new entrants and allowing incumbent players to extract rent from users. Stablecoins that reward holders should be allowed and encouraged, and therefore regulated with a different approach vs the pure payment systems approach.

Also, the FCA could opt to recognise credible supervisory frameworks for stablecoins in other jurisdictions to allow the operation of fiat-backed stablecoins in the UK even if issued abroad. This would allow new entrants to compete for stablecoin deposits by offering better, safer products, for consumers.

We would suggest regulating stablecoins for what they are, something new. The FCA could perhaps bring them in under dual-regulation if needed, but still let them pay an interest rate, and let the free market pick a winner from the competing products on offer.

## Chapter 3: Backing assets and redemption

### Q4: Do you agree with our proposed approach to regulating stablecoin backing assets? In particular do you agree with limiting acceptable backing assets to government treasury debt instruments (with maturities of one year or less) and short-term cash deposits? If not, why not? Do you envision significant costs from the proposal? If so, please explain?

Requiring the backing assets to be at least the value of the circulating stablecoin is self-evident. Stablecoins that do not meet this requirement are by definition insolvent. This requirement implies requiring stablecoins to not be insolvent.

The logic of the framework for 3.5-3.11 is also incomplete. It is at once too vague and too prescriptive. This DP proposes that ‘backing assets’ should be low risk, secure and sufficiently liquid. We consider it is too prescriptive because the DP is taking the role of the stablecoin’s Asset and Liability Management Committee (ALCO) and selecting what assets stablecoins should hold. The objective to ensure that supervised stablecoins are always able to meet their redemption obligations involves finding a suitable combination of liquid and solvent assets alike. Disregarding assets such as money market funds and only allowing government treasuries is an arbitrary distinction, in our view, and may be counterproductive in any case. Banks have a range of high-quality liquid assets they are permitted to hold in liquidity reserve buffers. For a number of reasons, there is benefit in enabling a wider range of high quality instantly liquid assets as “backing assets”.

Furthermore, we consider it too vague as the guidance would not have survived the test of ensuring that USDC did not run into potential solvency issues in March 2023 during the collapse of Silicon Valley Bank. In this episode, Circle, the issuer, had deposited short-term cash deposits at SVB, a regulated and supervised financial institution. The risk to the stablecoin was transmitted through poor management of SVB’s asset base (and excessively concentrated liabilities base) in the face of an increase in redemptions. This DP’s reserve guidance would not have been able to prevent exposure to this form of systematic risk. Other stablecoins, such as Tether, that do not follow the guidance, came out of the ordeal unscathed and in a much stronger market position.

Stablecoins are a novel financial instrument with many features resembling ordinary bank deposits, but with important nuances that make them an innovative new product. These nuances, namely the ability to publicly supervise and analyse user behaviour, make new varieties of risk management possible to improve prudential outcomes for risk management in stablecoin issuers. We discuss some of these approaches in the following paper: https://arxiv.org/abs/2401.13399. Having a strict, vague and prescriptive approach to backing asset composition would preclude the ability of stablecoin issuers to integrate some of these innovations into the management of the stablecoin.

There would be greater value in asking stablecoin issuers to make public and independently verifiable disclosures regarding the composition of their backing assets. In this way, regulators and users alike could inspect the composition of the balance sheet and conclude whether the strategy employed is suitable for their use-cases. There is no centrally issued stablecoin on the market today that goes to these lengths yet, relying instead on aggregated figures published on their websites and occasional reports from independent auditors. Virtually all of the prescriptiveness and need to impose regulations around backing assets could go away if, instead, centrally issued stablecoins disclosed their balance sheets with full, detailed, transparency on a real-time basis.

### Q5: Do you consider that a regulated issuer’s backing assets should only be held in the same currency as the denomination of the underlying regulated stablecoin, or are there benefits to allowing partial backing in another currency? What risks may be presented in both business-as-usual or firm failure scenarios if multiple currencies are used?

Yes we would agree with this prescriptive requirement. For a number of reasons (mainly related to adequate liquidity risk management), FX risk on the balance sheet should be avoided and backing assets should be denominated in the same currency as the underlying regulated stablecoin. This is to avoid changes in value due to FX fluctuations, and more importantly to avoid liquidity issues when converting the backing assets. Of the few overt prescriptions we would recommend the DP adopt, limiting currency exposure is one of them.

### Q6: Do you agree that regulated stablecoin issuers should be able to retain, for their own benefit, the revenue derived from interest and returns from the backing assets. If not, why not?

We strongly disagree, and strongly recommend that the DP adopt a more open minded approach. There is no reason why a stablecoin issuer should be able to privatise profits at the expense of individual users. Being in line with market practice would mean being in line with punitive and consumer-unfriendly behaviour.

Regulations that make the distinction that there is a type of instrument that is good for payments and another that is good for savings violates the singleness of money of the underlying currency when the instrument could just as well be used for either.

Enforcing single use-cases on the grounds that stablecoins are 'mostly for payment' is not congruent with their technical capabilities or, indeed, their use in-action. At time of writing, on Ethereum only, $14bn of USDC, $25bn of USDT and $2.7bn of DAI were simply sitting on user wallets without moving. Reference: https://dune.com/steakhouse/stablecoins

Entrenching this will basically nominate a few market winners and cement an unassailable monopoly situation in the future. Stablecoins should be allowed to compete on multiple angles, including offering an interest-rate. That this makes them more like financial products than payment products is an illustration of the need for a new approach to regulation.

To repeat our point in an earlier question: user-rewarding stablecoins such as USDM (Mountain Protocol), a fiat-backed and fully licensed stablecoin that pays a loyalty reward rate close to the US Federal Funds rate, are equally useful as payment tokens relative to USDC but are also capable of passing through a significant portion of the risk-free asset rate backing the collateral. This rate is bound to fluctuate over time but the underlying stablecoin is designed to always redeem at $1. There is no benefit in raising barriers to new entrants and allowing incumbent players to extract rent from users. Stablecoins that reward holders should be allowed and encouraged, and therefore regulated with a different approach vs the pure payment systems approach.

We would suggest regulating stablecoins for what they are, something new. They should perhaps come under dual-regulation if deemed necessary, but let them pay an interest rate and let the free market pick a winner from the competing products on offer.

### Q7: Do you agree with how the CASS regime could be applied and adapted for safeguarding regulated stablecoin backing assets? If not, why not? In particular:
- *Are there any practical, technological or legal obstacles to this approach?*
- *Are there any additional controls that need to be considered?*
- *Do you agree that once a regulated stablecoin issuer is authorised under our regime, they should back any regulated stablecoins that they mint and own? If not, why not? Are there operational or legal challenges with this approach?*

The CASS regime adaptations seem broadly suitable.

We believe that the focus on ‘preminted’ stablecoins is a red herring and not really addressing the risk of insolvency. An issuer can in any case mint as many ‘tokens’ as they wish, at any point in time, and to any address. Whether the tokens are ‘preminted’ or not, does not materially change the risk of insolvency through ‘overminting’.

Where stablecoins can offer an improvement to prudential outcomes over the CASS regime is in offering transparency over user behaviour, thus offering more data to issuers regarding the likelihood of a bank run, as well as the potential to offer greater transparency over the backing assets. Limiting disclosures to once a month or sub rosa disclosures only to the regulator are a disservice to the consumer. The regulatory framework should allow stablecoin issuers to compete over which stablecoin offers the greatest degree of transparency over the backing assets, and thereby encourage proper free-market competition.

Regarding ‘scraping excesses’, this is an inappropriate misnomer in our view. The positive return on assets from investing a balance sheet of user demand for stablecoins accrues to the issuer, indeed. However, the issuer should be allowed the choice to distribute this interest to its users. It is perfectly acceptable for a stablecoin to want to attract more users by offering a higher interest rate relative to competitors (analogous to deposit account rates in the banking market). The logical conclusion is more options for consumers and less rent extraction from private shareholders, facilitated by government regulations that allow them to extract such oligopolistic rent.

### Q8: We have outlined two models that we are aware of for how the backing assets of a regulated stablecoin are safeguarded. Please could you explain your thoughts on the following:
- *Should regulated stablecoin issuers be required to appoint an independent custodian to safeguard backing assets?*
- *What are the benefits and risks of this model?*
- *Are there alternative ways outside of the two models that could create the same, or increased, levels of consumer protection?*

The best possible outcome would be for the Bank of England to offer accounts to GBP stablecoin issuers so that they can deposit directly reserve assets at the BOE, instead of enriching a thriving intermediary industry that does not substantially modify the risk of failure, only shift it around. If not the BoE, then we recommend yes, an independent third-party central custodian.
### Q9: Do you agree with our proposed approach towards the redemption of regulated stablecoins? In particular:
- *Do you foresee any operational challenges to providing redemption to any and all holders of regulated stablecoins by the end of the next UK business day? Can you give any examples of situations whether this might this be difficult to deliver?*
- *Should a regulated issuer be able to outsource, or involve a third party in delivering, any aspect of redemption? If so, please elaborate.*
- *Are there any restrictions to redemption, beyond cost-reflective fees, that we should consider allowing? If so, please explain.*

*What costs associated with our proposed redemption policy do you anticipate?*

Restricting redemptions to wholesale users is a disservice to the retail consumer and a restriction on the ability for individual users to redeem their coins at par. The market should encourage issuers to offer redemption to all properly identified users. We agree wholeheartedly with the DP’s view that “as long as consumers are able to get an issuer’s stablecoin, they should have a right of redemption.”

Some fees may be acceptable to offset some of the overhead costs of processing redemptions but the market would, over the long run, compete those out.

### Q10: What proof of identity, and ownership, requirements should a regulated stablecoin issuer be gathering before executing a redemption request?

Exactly the same requirement as any financial institution is expected to gather for onboarding a new customer today.

## Chapter 4: Other key expectations of stablecoin issuers

### Q11: Do you agree with our approach to the Consumer Duty applying to regulated stablecoin issuers and custodians. Please explain why.

We agree with this perfectly reasonable expectation and stress that adhering to it would imply allowing stablecoin issuers to pay interest on stablecoin deposits. Allowing issuers to privatise profits at the expense of consumers would be delivering bad outcomes for retail consumers, and would fall foul of the Consumer Duty required by FCA-regulated firms.

### Q12: Do you consider that regulated stablecoins should remain as part of the category of ‘restricted mass marketed investments’ or should they be captured in a tailored category specifically for the purpose of cryptoasset financial promotions? Please explain why.

A tailored category may be suitable, to allow for the emergence of promotional communication suitable for stablecoins. For instance, an interest-bearing stablecoin may want to communicate in plain terms the rate offered to its holders on its website. As long as the communication is fair, clear and not misleading, there should be no issue in allowing this variety of communications.

## Chapter 5: Custody requirements

### Q13: Should individual client wallet structures be mandated for certain situations or activities (compared to omnibus wallet structures)? Please explain why.

Omnibus wallets should be fine–the point is to segregate the legal obligations of the issuer from customer assets. How they are technically implemented should not create a material difference to this resolution.

### Q14: Are there additional protections, such as client disclosures, which should be put in place for firms that use omnibus wallet structures? Are different models of wallet structure more or less cost efficient in business as usual and, (ii) firm failure scenarios? Please give details about the cost efficiency in each scenario.

We cannot comment on cost efficiency in these scenarios as our firm does not operate as a custodian. We limit our comments on specific issues relating to custody.

### Q20: Should cryptoasset custodians undertaking multiple services (eg brokers, intermediaries) be required to separate custody and other functions into separate legal entities?

They should be required to separate the legal obligations of the issuer from customer assets. Whenever there is a concentration of counterparty risk, there is the introduction of new varieties of risk. For example, in the domain of proof-of-stake network validation done by an intermediary, if an entity is the marketer, exchange, intermediary, custodian and staking provider, there is a very high density of counterparty risk that customers would not typically be exposed to in any other area of asset custody.

Mitigating this risk would be a good idea.

## Chapter 6: Organisational requirements

### Q23: Do you agree that our existing high-level systems and controls requirements (in SYSC) should apply to the stablecoin sector? Are there any areas where more specific rules or guidance would be appropriate?

The extent to which the SYSC applies may be limited by the design of the product relative to commercial banks. As the DP notices, one would expect the arrangements to be different, such as making use of transactional data when conducting risk management.

Conflict of interest disclosure and mitigation regimes seem perfectly applicable. See our answer to Q20.

### Q24: Do you agree with our proposal to apply our operational resilience requirements (SYSC 15A) to regulated stablecoin issuers and custodians? In particular:

Can you see how you might apply the operational resilience framework described to your existing business (eg considering your important business services and managing continuity)? Please set out any difficulties with doing this?

What approach do you take when assessing third party-providers for your own internal risk management (such as responding to, testing and managing potential disruption)?

Are there any minimum standards for cyber security that firms should be encouraged to adopt? Please explain why.

### Q25: Do you agree with our proposal to use our existing financial crime framework for regulated stablecoin issuers and custodians? Do you think we should consider any additional requirements? If so, please explain why.

No, as the nature of the risk is materially different. Risk exposure is highest at points where stablecoins can be converted for fiat currencies, which is where the traceability of the transactions ends. The more financial activity takes place entirely with stablecoins, the more likely it is for law enforcement authorities to learn, track and identify its participants. The risk therefore concentrates at the points where stablecoins merge with the existing financial system and the focus on risk mitigation should focus on that fulcrum.

## Chapter 8: Prudential requirements

### Q31: Do you agree with our proposed prudential requirements for regulated stablecoin issuers and custodians? In particular, do you agree with our proposals on any of the following areas: Capital requirements and quality of capital, Liquidity requirements and eligible liquid assets, Group risk, Concentration risk, Internal risk management

i. In our paper: https://arxiv.org/abs/2401.13399 we outline an approach to developing a capital-at-risk requirement derived from observing transactional data. This would adapt a traditional Basel-style approach to the flexibility of a stablecoin balance sheet. It could be combined with some of the proposed ideas in the CRYPTOPRU section, such as the PMR and FOR. We note there is a potential contradiction between section 3.8 which prohibits money market funds from being reserve assets, and section 8.46 which specifically requests backing assets to include money market funds. One can eliminate this incongruence by simply allowing more breadth of backing assets (perhaps along the lines of “HQLA” buffer eligibility as described in Basel III guidance). We can eliminate the credit risk of holding short-term cash deposits at banks (which are not eligible as HQLA under Basel III) by allowing stablecoins to deposit directly with the Bank of England.

Supervised stablecoins should be allowed to deposit directly with the BOE, rather than go through a UK bank, as this increases the credit risk. Again, in the case of USDC in March 2023, the risk was not as a result of any specific stablecoin or crypto exposure but credit risk with regulated banks that was transmitted into the crypto ecosystem through SVB. Allowing stablecoins to hold accounts at the central bank would eliminate this risk

ii. Holding a Liquid Asset Buffer (LAB) of High Quality Liquid Assets (HQLA) is highly advisable and a core part of the stablecoin business model. The liquidity risk requirements as-written suggest that the firm’s fixed overheads take priority over customer claims (the stablecoins); we consider this to be slightly strange! We recommend that a suitable model for minimum liquidity requirements could be expressed as a proportion of the balance sheet that is likely to seek redemption within 1 day (24 hours), as measured through historic user behaviour over a medium-term period. As currently with banks, the regulator would have a role to play in stress-testing liquidity risk models to ensure there is enough liquidity to meet a reasonable expectation of redemptions (e.g. T+2) under various market stress scenarios. This would be an alternative approach to simply mandating a flat minimum level of liquidity, which may be insufficient under certain circumstances.

iii. Stablecoins should be managed and ring-fenced independently of the activities of the parent company. We should not allow any credible threats to user deposits (stablecoins) because of unrelated activities in other areas of the business.

iv. Concentration risk is highly relevant and material, for example, in the SVB debacle for the stablecoin USDC. One of the largest sources of counterparty risk in stablecoins is in exposure to regulated banks through short-term cash deposits. This could be mitigated by allowing regulated stablecoins to hold accounts at the bank of England.

## Chapter 10: Regulating payments using stablecoins

### Q36: Do you agree that this approach to integrating PSR safeguarding requirements and custody requirements will secure an adequate degree of protection for users of stablecoin payment services?

All stablecoins can be used for payments. Applying PSR capital requirements to stablecoins is unsuitable, in our view. The capital requirement calculations do not consider the benefits and structural advantages of stablecoins. This is not to say that a minimum capital requirement is not needed - quite the contrary. Simply that the three Methods outlined for calculating the minimum capital requirements are designed for organisations with much greater overhead requirements and products radically different to stablecoins in use. The methodology used needs to be appropriate to the business model.

### Q37: Do you agree that the custody requirements set out in chapter 5 should apply to custody services which may be provided by payment arrangers as part of pure stablecoin payment services?

Yes.

### Q38: Are there additional risks or opportunities, not considered above, of different stablecoin payment models that our regulation of payment arrangers should seek to tackle or harness?

The biggest risk is to accidentally forbid stablecoins from paying interest to holders. Where the interest goes should be the prerogative of the stablecoin issuer, and should not be mandated to be privatised by regulations.

## Chapter 11: Overseas stablecoins used for payment in the UK

### Q39: What are the potential risks and benefits of the Treasury’s proposal to allow overseas stablecoins to be used for payments in the UK? What are the costs for payment arrangers and is the business model viable?

The Treasury’s proposal could create artificial ring fences that benefit only certain market participants. Furthermore, as the DP recognizes, the greatest consumer benefit from stablecoins as payment can occur when a user transacts directly with another through a blockchain transaction. For example, a merchant could have a self-hosted wallet for their business and register sales through blockchain transactions with stablecoins.

It is understandable that the DP would seek to enforce acceptability of stablecoins provided they align with Handbook standards. However, we believe that this risks missing high quality stablecoins that simply miss some of the technical standards and therefore become unusable for ordinary trade in the UK market.

The Handbook could instead, for example, focus on explaining outcomes rather than technical requirements for stablecoins to be recognisable as means of payment in the UK on par with locally issued stablecoins. If a stablecoin is regulated in another country, for instance, the FCA could agree to recognise transactions conducted with that stablecoin, provided some basic framework on solvency and liquidity were ensured. (Analogous to passporting regulatory approval across borders in the EU. Some regulatory authorities have more credibility than others).

Asking issuers to go through a registration process just to enter the UK puts the UK market at a disadvantage, rather than improving outcomes for consumers. However, local payment arrangers–for example merchant payment terminal providers that facilitate blockchain transactions for retail use–could be expected to demonstrate to the FCA that their selection of stablecoins meets minimum requirements for solvency and liquidity and for user safety.

### Q40: What are the barriers to assessing overseas stablecoins to equivalent standards as regulated stablecoins? Under what circumstances should payment arrangers be liable for overseas stablecoins that fail to meet the FCA standards after approval, or in the case where the approval was based on false or incomplete information provided by the issuer or a third party?

Payment arranger platforms should be responsible for the tools they enable for users to make transactions with stablecoins. To the extent that they fail to determine a significant risk of the stablecoins they support and that risk materialises, they should be held responsible for user damages.

The risks, harms and benefits the FCA lists are quite comprehensive. Greater competition is generally a good thing. The FCA should take care to prevent regulations from stifling competition. Payment arranger platforms could be reasonably compelled to support any FCA supervised stablecoin to prevent competitive vertical integration. This could extend to overseas stablecoins regulated at an equivalent level (e.g. a merchant payment terminal could reasonably be compelled to support any stablecoin supervised by the Bermuda Markets Authority if they support one)

## Chapter 12: conclusion

We are available and keen to engage with the FCA to discuss these proposals and our contributions further. We regularly collaborate with open source projects and centralised stablecoins in the space. Disclosure: we contribute to decentralised stablecoin projects and have advisory engagements with centralised stablecoin companies.