FCA Consultation on Cryptoassets — Response to Q4–6 (Remittances, Stable Coins)
I am currently working through the “FCA consultation on Cryptoassets (CP19/3)”. I will submit a written response on behalf of LexByte in due course, but I thought I’d already put drafts out for discussion as I go along, allowing me to improve them on the way. Enjoy, comment, and please do provide feeback if you want (stefan at lexbyte dot io, or message me on LinkedIn)
Q4: Do you agree with our assessment that exchange tokens could be used to facilitate regulated payments?
Q5: Are there other use cases of cryptoassets being used to facilitate payments where further Guidance could be beneficial? If so, please state what they are.
Q6: Do you agree with our assessment of stablecoins in respect of the perimeter?
In most cases exchange tokens will only be the second best solution for remittances when compared to bona fide stable coins. In fact, the only circumstances where exchange tokens will be genuinely better if the country and/or the recipients are subject to sanctions or on some kind of restrictions list, and arguably this is not the use case that regulation should support.
They key guidance important in this context is the interaction with AML regulations, and in particular those that discourage the use of bearer instruments and anonymous accounts in the regular banking system that can eg be found in Article 10 of AMLD4 (Directive (EU) 2015/849). As we have seen in the GFC it is not a good idea to allow the shadow banking system to operate under different rules than the regular banking system. If bearer crypto assets are allowed in the regulated remittances and payment space then banks should be allow to operate there under the same terms, and in particular be allow to issue stable coins for this purpose.
Let’s now move on to stable coins proper: it should be a general principle that instruments that perform a similar economic role should be subject to the same regulations, lest those regulations distort the market. There is therefore no good economic reason to treat for example stable coins used for remittances different from say Bitcoin or Ethereum when used for remittances (there might of course be good legal reasons to do so, but this is rather a sign that the legal framework has failed to catch up with technological developments and should be reviewed).
As I have already noted in the answer to question 1 it is my view that every token that is used for the purpose of payment on a regular basis should be regulated under something akin to the eMoney and payment systems regulations. There is an argument to be made that projects that are (a) currently under development and (b) are not used as major payment channels should get a waiver from having to comply with some or all eMoney and payments regulations as long as both (a) and (b) are fulfilled. This for example could mean that both bitcoin and current stable coins are currently considered under development and are therefore not subject to the relevant regulations. However, the goal should be to review the situation regularly and to eventually bring them under the payments and eMoney umbrella, and any changes in law necessary for that should be planned.
I also want to by reference include the points I made under Question 1 with respect to custodial arrangements for exchange tokens, and also the requirement to ensure the safety of funds under self-custody eg in so-called hardware wallets.
To summarize: Generally stable coins should be considered eMoney instruments, and if exchange tokens become important in the payments space so should they, in particular if they are held in a custodial relationship. Also there is a need to look at the safety of hardware wallets in real-world usage scenarios involving unsophisticated users. This probably requires major legislative changes, but those are important to avoid the development of an unregulated shadow banking and payments system that could threaten financial stability.
Stefan Loesch a managing partner at LexByte, an advisory firm specialising on tokenised investments. He has more than 20 years experience in financial markets, and his previous roles include advisory at J.P. Morgan and McKinsey and quant development at Paribas. He is the author of “A Guide to Financial Regulation for Fintech Executives” (Wiley 2018).
