Terminology
"Qualifying Stablecoin" is defined in a new section 88G of the FSMA (Regulated Activities) Order (RAO) as:
a 'qualifying cryptoasset' [see s88F] that:
(a) references a fiat currency; and
(b) seeks or purports to maintain a stable value in relation to that referenced fiat currency by the issuer holding, or arranging for the holding of:
(i) fiat currency; or
(ii) fiat currency and other assets,
irrespective of whether the holding of a fiat currency other than the one referred to in sub-paragraph (a) or other asset contributes to the maintenance of that stable value.
However, this will not include a tokenised bank deposit.
"Issuing" a qualifying stablecoin in the UK involves the issuer only accepting (a) money; or (b) other qualifying stablecoins issued by FCA-authorised firms, in exchange for qualifying stablecoins they issue. Where issued in exchange for money, it follows that the stablecoin they might also qualify as e-money; and this is pretty much how the FCA is treating them, albeit as a distinct form. Unlike [other] e-money, qualifying stablecoins form a subset of qualifying cryptoassets; have a secondary market value [so does e-money, where it turns out too little cash is safeguarded], and the issuer can mint tokens before receipt of funds from token holders [like prepaid/smart cards?]. The FCA proposes to consult on guidance further clarifying the differences once legislation is passed.
"Creating" includes the technical design of a qualifying stablecoin on any form of DLT, including on private, public, permissioned or permissionless blockchains. Issuers must identify and manage the risks associated with 'creation' (the design and build of a qualifying stablecoin) before it is issued. This includes analysing the risks of the underlying DLT and making sure they can manage potential disruptions
"Minting" a qualifying stablecoin such that it first exists as an identifiable asset on the blockchain in a transferrable form - an issuer must always hold backing assets in amounts equivalent to the value of the stablecoins that have been minted (1:1 in a single fiat currency, regardless of how the backing assets might perform in the markets for those types of assets). The jury is out on whether multi-currency stablecoins will be permitted, as they introduce FX and liquidity risks and the fact that 'par' would be judged against a basket of currencies, yet redemption could only be in one, thereby crysalising losses/gains.
"Burning" or permanently removing the stablecoin from circulation (on the blockchain).
Backing Assets
Only certain asset classes can be used to 'back' a stablecoin, including on demand deposits; and government treasury debt instruments that mature in one year or less. This is because the composition of the 'backing asset pool' must be able to meet requirements for redemption at all times and ensure that the qualifying stablecoin maintains stability.minimum ‘floor’, known as the on-demand deposit requirement (ODDR), for the proportion of backing assets that must be held in bank deposits that are available on-demand. The ODDR is set at 5% and will apply to all stablecoin issuers - both those who only use core backing assets and those who opt-up to use expanded backing assets (who would also need an appropriate backing asset risk management tools and comply with the backing assets composition ratio (BACR) that has a core requirement (CBAR) and an estimated 'daily redemption amount (DRA) for each of the up-coming 14 redemption days, by reference to the experience over the prior 180 redemption-day period, with increases in the CBAR for each redemption day where the actual DRA is at least 110% of the forecast DRA. The intention is that core backing assets should be sufficiently liquid to meet redemptions within the T+1 timeframe. Accordingly, in this context, short term deposits must be repayable on demand or have an immediate break clause attached to them. Issuers should ensure that they manage the portion of government debt instruments used to meet the BACR in a way that meets their redemption obligations.
However, with permission and additional controls, public debt of a longer residual maturity; assets, rights or money held as a counterparty to a repurchase agreements or reverse repurchase agreements; and some limited money market funds might qualify as backing assets.firms to determine their own compositions, based on factors including the redemption modelling they undertake on an ongoing basis. An appropriate backing asset composition will be driven in part by the maturity and liquidity of the underlying assets. This will be set against the requirement for firms to place a payment order for redeemed funds by the end of the business day following receipt of a valid redemption request
Statutory Trust Over Backing Assets
The FCA is still proposing a statutory trust over backing assets held by the issuer as trustee for the benefit of stablecoin holders as beneficiaries, so there would be a fiduciary duty between the issuer and stablecoin holders. This seems more consistent with a stablecoin being an investment instrument, rather than money-like, even though some rules are intended to redress this. It must also mean that the beneficiaries hold both a stablecoin and a beneficial interest in backing assets to the same value as that stablecoin - which surely adds up to two in economic/accounting terms?
The issuer must appoint an independent third party (not a group company), to safeguard the backing assets, which must be promptly segregated on receipt. This sounds like good news for the custody industry and expensive.
If an issuer issues more than one qualifying stablecoin it must ensure that the backing assets for each stablecoin product are held separately and under separate trusts for the benefit of each separate group of stablecoin holders for each corresponding qualifying stablecoin pool.
The issuer retains the obligation to ensure that each set of backing assets are managed appropriately and the qualifying stablecoins are backed 1:1 with the backing assets at all times.
There must be reconciliations of backing assets at least daily and to ensure shortfalls are topped up and excesses removed, or that qualifying stablecoins are minted or burned to ensure parity is maintained.
The issuer must redeem its qualifying stablecoins to all qualifying stablecoin holders at par, with no minimum redemption amount of stablecoin per redemption request, to an account in the name of the holder by the end of the business day following receipt of the request. Any redemption fee must be 'commensurate' with the operational costs incurred for executing redemption (not costs and losses arising from the sale of assets in the backing asset pool); and must not exceed the value of the stablecoins being redeemed. So the par value is the value of one unit of the reference currency, multiplied by the number of stablecoins being redeemed, irrespective of the value of the backing assets - so the redemption value should not fluctuate in line with the performance of the underlying backing assets (as is the case with a fund).
Issuers can retain interest on backing assets, but cannot pass interest or dividends/benefits on the backing asset pool to qualifying stablecoin holders (directly or indirectly), further distinguishing qualifying stablecoins from funds or other investment products.
The draft RAO distinguishes 'issuing a qualifying stablecoin' from the operation or management of a Collective Investment Scheme (CIS) or Alternative Investment Fund (AIF), of which Money Market Funds are a subset, but the FCA foresees the need to consult on the differences in due course...
Issuers must publish the number of stablecoins issued and the backing asset composition at least once every three months. (I don't understand why this is not daily - anything could happen in three months), along with e.g. technology used, third parties outsourced service providers and the redemption process.
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