About Innovate Finance

Innovate Finance is the independent industry body that represents and advances the global FinTech community in the UK. Our mission is to accelerate the UK’s leading role in the financial services sector by directly supporting the next generation of technology-led innovators.

Our members include a wide range of firms interested in digital assets, digital money and payments including blockchain infrastructure providers, payment systems and services, digital wallets, global stablecoin services, GBP stablecoin issuers, challenger banks and advisory firms. In particular our membership includes global stablecoin issuers and services, UK GBP stablecoin start ups, and payments firms and challenger banks (including UK fintech unicorns) who are already providing stablecoin services in other markets. We therefore represent the full ecosystem of potential GBP stablecoin issuers and providers and have a unique 360 degree view of business models.

Summary:
1. We believe the UK can be a major global hub for stablecoin payments and services and that this can build resilience in UK payments and financial markets as well as boosting productivity in UK corporates and SMEs. The Innovate Finance annual Fintech Investment Landscape report documents the substantial appetite to invest in UK stablecoin businesses.

2. The UK is at a critical point in finalising its approach to regulation of stablecoin, at a time when the global landscape and market development is fast solidifying. This will determine whether the UK and GBP is of any significance in international markets, and will determine whether UK digital payments in the future are dominated by a small number of large overseas firms or whether the UK can rapidly build its own national and international champions.

3. Current UK regulatory proposals do not provide the basis for the emergence and growth of GBP stablecoin, and present a substantial risk that UK consumers and businesses could be subject to currency risk and geopolitical volatility.

4. At present, the Bank of England's proposals create a significant handicap to any business models that may be developed by our UK challenger banks, our payments firms and our stablecoin start ups. It provides no hope of building British stablecoin champions who can strengthen UK resilience and grow in overseas markets.

5. The UK has the opportunity to take ‘second mover advantage’ internationally but the Bank of England's proposed regime is significantly less proportionate and competitive than the EU’s MiCA, let alone other jurisdictions. This can be remedied with alternative approaches to risk.

6. In this paper we share ideas we have submitted to the Bank of England and FCA which set out alternative regulatory approaches on the key areas, with industry proposals on more effective and proportionate ways of managing systemic risks whilst also supporting growth and innovation and - through these - strengthening UK payments resilience, building sovereign capability and ensuring sterling retains its position as the fourth most traded currency in the world and the third most held reserve currency.

7. Limited but significant adjustments to the Bank’s and FCA proposals are needed in the following areas:

A competitive and proportionate Bank of England regulatory regime

• Replace proposed holding limits with a more proportionate approach: No one will invest in GBP stablecoin whilst holding limits are in force: no other major jurisdiction requires these and they will prove operationally extremely expensive to implement.
• Remunerated backing assets: The requirement for 40% of backing assets to be unremunerated Bank of England deposits makes business models unviable and (at best) uncompetitive, and potentially increases the risk of financial instability for any systemic firm.
• Timely redemption: The Bank’s requirement that redemption requests should be processed by the end of the day and that fees should be prohibited or cost-based is unduly restrictive, creating disproportionate requirements that the US and others have not mandated.
• Commercial bank issuance: The Bank’s ban on UK commercial banks issuing stablecoins (as set out in the November 2023 Dear CEO letter) should be lifted.

Proportionate FCA prudential requirements:
The FCA’s operational & wind down capital proposals would require a stablecoin issuer to put an ever increasing amount of capital aside as the number of stablecoins in issuance increases. But the costs of running a stablecoin issuance business do not increase in line with the number of stablecoins issued - they will quickly reach a cap, given efficiencies of scale (and the stablecoins themselves are covered by separate backing assets). These proposals make UK stablecoin issuance unviable.

Currently, the UK risks missing the opportunity to lead in this next generation of innovative financial services and maintain GBP as a global currency. We need a cohesive regime between the FCA and Bank of England featuring regulatory clarity and proportionality, with underlying assets that are secure and interest bearing, and a communal push to make adoption work rather than measures which constrain investor appetite or consumer and business usability.

We have provided further detail in response to questions set out in the Committee’s call for evidence.

Read the Submission Here