Bank of England speech on payments trends and cryptoassets following Covid-19

Following Covid-19, the message from the UK financial regulators regarding payments firms and payments innovation has stepped up. Recently, the Bank of England published a speech given by Christina Segal-Knowles (Executive Director, Financial Market Infrastructure Directorate) on 11 June in which she discussed the emerging themes and challenges for payments firms and payments innovation. Continue reading

FCA consultation on proposed guidance for payments firms: COVID-19 and safeguarding customer funds

After highlighting payment services as a priority in its 2020/21 business plan and following “evidence that some firms have not implemented the Electronic Money Regulations 2011 or Payment Services Regulations 2017 as [the FCA] expects”, the FCA has published a short consultation proposing further guidance for Payment Services Providers (PSPs), including Payment Institutions (PIs) and E-Money Institutions (EMIs).

The FCA gives the following as examples of areas where some firms are not fully complying with the safeguarding rules:

  • co-mingling of customer and firm funds;
  • failure to keep accurate records and accounts; and
  • insufficiently effective risk management procedures.

Following the consultation, the FCA plans to publish a “Dear CEO” letter incorporating the guidance (as amended). That guidance is intended to take effect temporarily, until the Approach Document is updated following a full consultation “later in the year”, which will likely include a proposal to incorporate the temporary guidance. The proposed guidance will also outline how firms can put in place more robust wind-down plans.

The FCA notes that payment services is an area that continues to undergo rapid development and that, while innovation is to be welcomed, many new entrants to the market are unprofitable at an early stage. The FCA is concerned, in particular, that these firms will face additional financial pressure as a result of the COVID-19 pandemic, which potentially threatens both customer revenues and the ability to seek external funding where required.

Next steps

Firms are asked to consider the proposed guidance and send any comments to the FCA by 12 June 2020.

Background and context

The proposed guidance follows an FCA review in H1 2019 of the compliance of 11 non-bank PSPs with the requirements for safeguarding service users’ funds under the Payment Services Regulations (PSRs) 2017 and Electronic Money Regulations (EMRs) 2011. This in turn led to the FCA’s issuance of a “Dear CEO” letter outlining the shortcomings found by the review and requesting non-bank PSPs to review their safeguarding arrangements, promptly remedy any inadequacies and attest to certain matters.

The rapid growth of both the payment services market and some firms in it, is both acknowledged by the FCA in its guidance and clearly reflected in the evolution of the surrounding regulatory landscape, marked by the revised Payment Services Directive (PSD2) which came into force in January 2018, four successive versions of the FCA’s Approach Document since September 2017 and a number of consultation papers by both the FCA and PRA.

Firms should continue to expect this to be an area of increasing regulatory focus, particularly amidst the current COVID-19 crisis. As with the client money regime for investment firms, it is likely that the FCA will view ongoing failures to comply with the safeguarding rules as a particularly serious matter.


Clive Cunningham
Clive Cunningham
Partner, London
+44 20 7466 2278

Mark Staley
Mark Staley
Senior Associate, London
+44 20 7466 7621

Harry Millerchip
Harry Millerchip
Associate, London
+44 20 7466 6447

Payment Systems Regulator focuses on innovation in payments with the New Payments Architecture

Genevieve Marjoribanks, Head of Policy at the Payment Systems Regulator (PSR), delivered an insightful speech to the Westminster Business eForum this week on innovation in payments and the next steps for digital payments in the UK. One of the PSR’s three key objectives is to promote the development of and innovation in payment systems, including the infrastructures that are used for these systems.

The PSR will be issuing a draft policy statement later this year. Businesses which are active in the payments space or rely on Bacs or Faster Payments technology should consider feeding in views on the proposed changes and future regulatory approach.

The New Payments Architecture (NPA) is a key priority for the PSR. The aim is to achieve an ambitious Blueprint plan set out by the Payment Strategy Forum (Forum) of developing a more innovative and competitive interbank payments environment, underpinned by a resilient and sustainable infrastructure. To this end, Faster Payments and Bacs systems will be moved to use central infrastructure that uses the global ISO20022 messaging standard which has or will be adopted for payments in the Single Euro Payments Area (SEPA), USA and Australia. The PSR believes that ISO20022 will bring increased interoperability, competition and richer data capabilities.

Similarly, Pay.UK and the Bank of England (BoE) have been working to define a ‘Common Credit Message’ for domestic payments using the ISO20022 standard which will provide for increased consistency and interoperability across the UK’s wholesale and retail payments systems. By upgrading the UK’s interbank payments services to use the global ISO20022 messaging standard for, and enabling other enhancements contained in the Forum’s Blueprint, such as promoting innovation through the use of Application Programming Interfaces (APIs), the PSR believes the UK’s position as a payments leader will be maintained.

Developing the NPA ecosystem sits with Pay.UK which is consulting existing Bacs and Faster Payments participants, as well as future users. Implementation will require careful consideration, weighing up the potential innovation benefits to users versus costs and risks, particularly as both the industry and wider economy that it serves is facing a period of uncertainty given recent events such as Brexit and the COVID-19 outbreak.

Clive Cunningham
Clive Cunningham
Partner, London
+44 20 7466 2278
Mark Staley
Mark Staley
Senior Associate, London
+44 20 7466 7621
Katie McGrory
Katie McGrory
Associate, London
+44 20 7466 2669

Addressing concerns around ‘global stablecoins’: FSB proposes an extensive regulatory framework

First published on Thomson Reuters Regulatory Intelligence on 13 May 2020

In April, the Financial Stability Board (FSB) published, in response to a request from the G20, its awaited consultation on the regulatory, supervisory and oversight challenges raised by “global stablecoins” (GSCs). Given the FSB’s remit, the focus of the consultation is on the impact of GSC arrangements on international financial stability, together with market integrity and consumer protection. It expressly does not address matters ranging from monetary policy, monetary sovereignty and currency substitution to data privacy, competition or taxation.

Overview: what are global stablecoins and why do they raise financial stability concerns for the FSB?

Nature of the instrument and arrangement

The FSB defines stablecoins as “a crypto-asset that aims to maintain a stable value relative to a specified asset, or a pool or basket of assets”.(The stabilisation mechanism of a stablecoin could alternatively be algorithm-based, attempting to maintain a stable value via protocols that provide for the increase or decrease of the supply of stablecoins in response to changes in demand.) A GSC is a stablecoin “with a potential reach and adoption across multiple jurisdictions and the potential to achieve substantial volume”.

The focus of the FSB is on a stablecoin arrangement as a whole, which is described as “an arrangement that combines a range of functions (and related specific activities) to provide an instrument that purports to be used [as] a means of payment and/or store of value”. This is particularly with respect to privately-issued GSCs primarily used for retail purposes and that may be widely used as a means of payment and/or store of value. The FSB notes that the matters it raises may also be relevant to other types of stablecoin or crypto-asset arrangements.

Illustration of functions and activities within a stablecoin arrangement

Concerns raised

Where a GSC has achieved systemic importance, GSC arrangements could affect financial stability in a number of ways. For example, any fluctuations in value could affect spending decisions and economic activity. If widely used for payments, any operational disruption could significantly impact economic activity and financial system functioning; and exposures of financial institutions might increase in scale and change in nature – particularly if they perform multiple roles in a GSC arrangement (e.g., as resellers, wallet providers, managers or custodians/trustees of reserve assets). Large-scale redemptions of GSCs could mimic the impact of bank runs.

Given the potential impact on financial stability, the FSB is concerned about how GSC arrangements are designed and performed, and whether they can withstand shocks. It notes that:

“… depending on the facts and circumstances, the decentralised nature of GSC arrangements could pose governance challenges; stabilisation mechanisms and redemption arrangements could pose market, liquidity and credit risks; and, the infrastructure and technology used for recording transactions, and accessing, transferring and exchanging coins could pose operational and cyber- security risks“.

Currently, regulators tend to apply existing regulation to the activities of, and entities involved in, GSC arrangements. This is in line with the “same business, same risks, same rules” principle, and indeed, if GSCs take hold, then existing regulation may adapt to accommodate them. (Across the 51 jurisdictions that responded to the FSB’s survey, the “most common approach [to regulatory classification] is to identify the activity performed by a stablecoin arrangement and the participants involved, and apply the relevant existing regulation for that activity or entity according to the “same business, same risks, same rules” principle”.)

As they stand, however, existing regulatory regimes are not sufficient to capture GSC arrangements in a holistic way and would not address all risks associated with them. To illustrate, the functions and activities that are most likely in scope of current regulation include issuance and redemption of stablecoins, managing reserve assets, providing custody/trust services for reserve assets, exchanging and trading, and storing the private keys for wallets. Governance and control over the whole stablecoin arrangement, operation of the infrastructure of a stablecoin arrangement and the validation of transactions tend to fall outside the scope of existing regulation, however.

Addressing concerns raised

There are two main obstacles that can be identified within the gaps and challenges identified by the FSB:

  • First, sector-specific regulation does not map neatly onto GSCs. GSCs which bundle attributes may cut across sectoral regulations, resulting in a patchwork.
  • Second, the cross-border nature of GSC arrangements gives rise to the potential for regulatory arbitrage between regimes.

The FSB proposes 10 high-level recommendations (see box below) to promote consistent and effective regulation, supervision and oversight. The intention is that the recommendations support responsible innovation (by being technology neutral) and allow domestic flexibility in implementation, whilst mitigating the risks arising from GSCs that are used as a means of payment and/or store of value. Whilst the recommendations are addressed to national authorities, substantively they split between obligations on authorities and requirements applicable to GSC arrangements.

Authorities: facilitating effective regulation and oversight Private GSCs: achieving appropriate structure, design and regulatory compliance
Powers and tools

Recommendation 1: Authorities should have and utilise the necessary powers and tools, and adequate resources, to comprehensively regulate, supervise, and oversee a GSC arrangement and its multi-functional activities, and enforce relevant laws and regulations effectively.

Comprehensive governance framework

Recommendation 4: Authorities should ensure that GSC arrangements have in place a comprehensive governance framework with a clear allocation of accountability for the functions and activities within the GSC arrangement.


Functional and proportionate approach

Recommendation 2: Authorities should apply regulatory requirements to GSC arrangements on a functional basis and proportionate to their risks.

Effective risk management frameworks

Recommendation 5: Authorities should ensure that GSC arrangements have effective risk management frameworks in place especially with regard to reserve management, operational resiliency, cyber security safeguards and AML/CFT measures, as well as “fit and proper” requirements.

Comprehensive cross-border and cross-sector regulation and co-operation

Recommendation 3: Authorities should ensure that there is comprehensive regulation, supervision and oversight of the GSC arrangement across borders and sectors. Authorities should cooperate and coordinate with each other, both domestically and internationally, to foster efficient and effective communication and consultation in order to support each other in fulfilling their respective mandates and to facilitate comprehensive regulation, supervision, and oversight of a GSC arrangement across borders and sectors.

Robust data systems

Recommendation 6: Authorities should ensure that GSC arrangements have in place robust systems for safeguarding, collecting, storing and managing data.

Ensuring compliance: before operations commence and on an ongoing basis

Recommendation 10: Authorities should ensure that GSC arrangements meet all applicable regulatory, supervisory and oversight requirements of a particular jurisdiction before commencing any operations in that jurisdiction, and construct systems and products that can adapt to new regulatory requirements as necessary.

Recovery and resolution plans

Recommendation 7: Authorities should ensure that GSC arrangements have appropriate recovery and resolution plans.

Transparency, particularly of stabilisation mechanism

Recommendation 8: Authorities should ensure that GSC arrangements provide to users and relevant stakeholders comprehensive and transparent information necessary to understand the functioning of the GSC arrangement, including with respect to its stabilisation mechanism.


Recommendation 9: Authorities should ensure that GSC arrangements provide legal clarity to users on the nature and enforceability of any redemption rights and the process for redemption, where applicable.

Design-inherent ability to adapt to new regulatory requirements

Recommendation 10: Authorities should ensure that GSC arrangements meet all applicable regulatory, supervisory and oversight requirements of a particular jurisdiction before commencing any operations in that jurisdiction, and construct systems and products that can adapt to new regulatory requirements as necessary.


Important challenge for national regulatory authorities: developing and implementing appropriate cross-border cooperation mechanisms

An important challenge will be to give national authorities the ability to supervise and oversee a stablecoin arrangement holistically, rather than in a piecemeal framework based on its component functions and activities. This is likely to require legislative change, followed by a fundamental change in regulatory approach. Authorities will need to consider their own regulatory frameworks and how the arrangement interacts across jurisdictions. Arrangements for information-sharing and co-operation will be needed. Arrangements akin to those in place for Global Systemically Important Financial Institutions (G-SIFIs) may be an appropriate model. Traditional cross- jurisdictional supervisory approaches will generally not work when applied to GSC arrangements, for two reasons.

First, stablecoin arrangements may be a loose network of unrelated entities only held together by common policies, standards and agreements about respective roles. This would present challenges for identifying the “home” jurisdiction. Secondly, functions of stablecoin arrangements are a hybrid of traditional financial groups and financial market infrastructures (FMIs).

While there are existing examples of internationally-agreed standards that apply in a cross-border context, e.g., the CPMI/IOSCO Principles for Financial Market Infrastructures, the challenge will be to move from a patchwork approach to a model where all the various aspects can be dealt with together to ensure that from the outset – and on an ongoing basis – a GSC arrangement can function appropriately in the economy. The FSB envisages cooperation arrangements in different forms, including supervisory colleges, fora or networks. In terms of structure, the FSB refers to general bilateral and multilateral memoranda of understanding covering cooperation and information sharing, and crisis management and resolution, which are complemented by single focus mechanisms (e.g., on cyber security).

It appears that a holistic approach model would be a prerequisite for an authority being able to satisfy FSB’s recommendation 10. It will be interesting to see how an authority can satisfy itself that all requirements in its jurisdiction in relation to a whole GSC arrangement are met, particularly for example if resellers, custodians and wallet providers are located in its jurisdiction but the governance and stability mechanisms are located in other jurisdictions; and if an authority is not so satisfied, how it could enforce a prohibition on operation in its jurisdiction.

GSC arrangements to be subject to substantial and wide ranging regulatory obligations

Prior to mid-2019, the prospect of a detailed regulatory regime being developed for stablecoins might have been met with a degree of surprise and scepticism.

Governance framework and permissible degree of decentralisation

Given the interconnectedness, GSC arrangements will need to have in place governance structures and accountabilities covering the whole arrangement – activities, functions and participants. The FSB expects such governance structures and accountabilities would:

  • have one or more governance bodies or equivalent mechanism facilitating appropriate oversight, governance and safeguards. It could be challenging to satisfy these requirements if fully permissionless ledgers are used;
  • be based on a sound legal basis;
  • be clear and transparent, and disclosed to users and other stakeholders;
  • show allocation of accountabilities among different entities in different jurisdictions; and
  • show limits on accountability and legal liability on a per jurisdiction basis.

Similar to the rules on traditional outsourcing, where a GSC arrangement relies upon a third party, the GSC governance body must demonstrate that this reliance does not impede its ability to meet regulatory requirements and expectations. However, it is unclear what would be caught here given the separate entities with loose connections that may form part of a GSC arrangement.

Risk management frameworks

Similarly, all functions and activities of GSC arrangements must be subject to appropriate risk management. A GSC arrangement will need appropriate policies, procedures and processes, covering at least the following risks: operational; AML/CFT; cyber; market risks; and those idiosyncratic risks presented by permissionless or anonymous networks. These risk management arrangements will need to be evidenced prior to commencing operations (in line with recommendation 10).

Under the heading of ‘risk management’, four further categories of requirements are set out:

  • Testing: continuous risk assessments, contingency preparedness and continuity planning.
  • Assurance of settlement finality: evidence of how the technology model and rules for transferring coins achieve settlement finality.
  • Financial requirements:
    • Strict rules on management of reserve assets, covering:
      • duration, credit quality, liquidity and concentration of reserve assets;
      • increase or decrease in reserve assets corresponding to issuance and destruction of GSC (asset-linked stabilisation mechanisms); and
      • increases and decreases in reserve assets being managed to avoid impacts on the broader market.
    • Adequate capital and liquidity buffers.
  • Fit and proper: individuals involved in the management and control of the GSC arrangement, and those exercising significant power or discharging significant responsibilities in relation to GSC activities, must satisfy “fit and proper” standards.

Robust data systems

Data management systems within GSC arrangements will need to satisfy certain requirements, including:

  • recording and safeguarding relevant data and information in a discoverable format;
  • complying with all applicable data privacy requirements;
  • safeguarding the integrity and security of on-chain and off-chain data; and
  • data being accessible to authorities in a complete and timely manner.

Recovery and resolution plans

GSC arrangements will need to have in place plans to support an orderly wind-down or resolution, which should include continuity or recovery of any critical functions and activities within the GSC arrangement. The implementation of these plans will need further consideration, taking into account the entities within a GSC arrangement and their geographical distribution.


A lack of transparency has been a cause of failure in stablecoins to date, particularly where it leads to a lack of confidence. This recommendation relies on transparency to bolster confidence and mitigate failure risk. There is an extensive list of aspects of a GSC arrangement to be disclosed, including:

  • governance structure;
  • allocation of roles and responsibilities assigned to operators or service providers;
  • design of the stabilisation mechanism and how it maintains the stablecoin’s value;
  • operation of the stabilisation mechanism;
  • investment mandate for the reserve assets;
  • custody arrangement and applicable segregation of reserve assets;
  • dispute resolution mechanisms or procedures for seeking redress or lodging complaints;
  • mechanisms in place to protect users in event of modification of GSC arrangement which could have a material impact;
  • amount of GSC in circulation (subject also to independent audit); and
  • value and composition of assets in the reserve backing the GSC (subject also to independent audit).


This recommendation concerns not only legal clarity, but also transparency, in relation to redemption rights. Redemption rights may not feature in all GSC arrangements. To the extent they do, they will have to comply with the following requirements:

  • Cost of redemption
    • Predictable and transparent rates of exchange.
  • Disclosures:
    • Nature and enforceability of redemption rights.
    • Any claims users and intermediaries may have on underlying reserve assets.
    • Any claims users and intermediaries may have against the issuer or guarantors.
    • How claims may be treated in insolvency or resolution.
    • Process for redemption and enforcement of claims.
    • Recovery avenues for user who loses access to his/her wallet and private key due to cyber-attack/other operational incident.
  • GSC widely used for payment purposes:
    • Prudential standards comparable to those applicable to financial institutions performing the same economic functions and posing similar risks to be followed.
    • Redeemable at par into fiat (where authority considers it appropriate).

Adaptability of design to accommodate new regulatory requirements

This last recommendation effectively requires GSC arrangements to:

Prior to launch:

    • Proactively engage with relevant authorities, and meet all applicable regulatory, supervisory and oversight requirements in all jurisdictions of operation; and
    • obtain any necessary licenses or registrations.

On a continuing basis:

    • Be designed in such a way so as to be able to maintain that level of compliance, even where regulatory requirements change.


Clive Cunningham
Clive Cunningham
Partner, London
+44 20 7466 2278
Wendy Saunders
Wendy Saunders
Senior Associate, London
+44 20 7466 2373

COVID-19: Pressure Points: Impact on UK criminal investigations & justice system

COVID-19 and the related lockdown restrictions are placing the UK criminal justice system under considerable pressure.  In the public sector, law enforcement agencies (LEAs), the courts and the prison system are having to adapt rapidly in response and, like the rest of the country, to adopt unprecedented measures to continue to progress their work. In the private sector, businesses need to be alert to developing fraud risks, both of fraud directly related to COVID-19, and of fraud facilitated by novel working patterns.

In this briefing we discuss a number of COVID-19 related measures impacting the investigation and prosecution of economic crime, and the criminal justice system more broadly.  We also touch on fraud risks and financial crime compliance considerations arising from the COVID-19 pandemic, which we will discuss more fully in a future briefing.

Continue reading

Cryptoassets and DLT: global stablecoins v CBDCs and the potential for private DLT to connect public payment systems

This article has also been published by the International Financial Law Review (IFLR).

The payments sector is one of the fastest growing sectors within the financial services industry. It is underpinned by consumers’ widespread move away from physical cash and towards electronic payments. Whether consumers are using payment cards or apps, the result has been a continual increase in the volumes of payments being processed electronically. This has created an enormous opportunity for payments businesses such as FIS and Fiserv (in the US) and Nexi and Klarna (in the EU) to establish themselves as key players in the payment chain, with the potential to become systemically important.

These businesses participate in a well-developed and very active area of the payments sector. So, what comes next?

The use of distributed ledger technology (DLT), and the associated use of cryptocurrencies and other cryptoassets, has long been discussed as a potential means for making global payment systems more efficient and more secure. For many years, payment processing has relied on centralised channels to transfer money, by established participants such as card issuers, clearing banks, and merchant acquiring banks and card schemes. By contrast, DLT involves a decentralised, shared ledger, with no need for central intermediation. It is considered immutable.

The question is, to what extent will cryptoassets become more widely used in the payments sector, including their potential use by central banks. Stablecoins, a relatively recent and topical sub-class of cryptoassets, may play a key role here. It will be interesting to see what types of stablecoins emerge and how they fit into the broader UK regulatory framework applicable to cryptoassets. Another important issue derives from two key aspects of stablecoins that are designed to facilitate payments: (i) in relation to the asset itself – concerns raised by private stablecoins, and whether a central bank digital currency could be an alternative; and (ii) in relation to the technology underlying it – its possible utility as a private payment system and question marks over whether it can co-exist with or link into public payment systems.

Stablecoins: how are they categorised and why does it matter?

“Bitcoin, the first and still the most popular cryptocurrency, began life as a techno-anarchist project to create an online version of cash, a way for people to transact without the possibility of interference from malicious governments or banks.” (The Economist, 30 August 2018)

Sadly for the original creators of cryptocurrencies – and despite their anarchistic intentions, cryptocurrencies and other types of cryptoassets cannot be exempt from the application of law and regulation just because they are a technological construct. The tone for the UK regulatory approach was set in the UK Cryptoassets Taskforce report, where the government stated its ambition for the UK to be the world’s most innovative economy and to maintain its position as one of the leading financial centres globally, to be achieved in part by “allowing innovators in the financial sector that play by the rules to thrive”. The message is clear: innovation is encouraged, but only where it complies with high standards of regulation.

The genesis of stablecoins, a relatively recent sub-category of cryptoassets, was an attempt to address the high price volatility exhibited by many cryptoassets so far. Stablecoins are, in short, cryptoassets that are backed by other assets, including fiat, commodities or other cryptocurrencies (a fuller definition is contained in the Financial Stability Board’s (FSB) ‘Regulatory issues of stablecoins’, 18 October 2019).

There are many types of stablecoin, each with different structures, functions and uses. Despite the word ‘coin’, a stablecoin could constitute a financial derivative, a unit in a collective investment scheme (fund), a debt security, e-money, or another type of specified (regulated) investment. They could potentially fall within any of three broad categories of cryptoassets as described by the UK Financial Conduct Authority (FCA), the categories having been revised in July 2019 following an earlier consultation.The diagram in Figure 1 compares the prior and current UK FCA categories of cryptoassets.

The position could change. During 2020 UK HM Treasury is expected to consult on expanding the regulatory perimeter. The EU Commission is also consulting on an “EU framework for markets in crypto-assets”.

It was the prospect of a stablecoin achieving, in a very short timescale, widespread adoption for transactions currently processed by retail and wholesale payment systems, particularly if integrated into existing online platforms or social media, that brought stablecoins into the sharp focus of national and international regulatory bodies. In a Bank of England speech (Responding to leaps in payments: from unbundling to stablecoins), Christina Segal-Knowles noted that: “In India, Google Tez reported having 50 million users 10 months after its launch in September 2017. In China, Alipay and WeChat Pay by some measures handled more than $37 trillion in mobile payments in 2018”.

The UK and other regulators consider that an appropriate regulatory framework needs to be adopted for stablecoins prior to their launch.

Global stablecoins as a payment asset

Key drivers for the creation of stablecoins as an alternative payment asset include improving
cross-border payments, to increase speed and reduce costs; assisting with financial inclusion
and providing payment tools for people who are underbanked or underserved by financial
services; and the growing preference in society for peer to peer interactions.

However, there are significant challenges and risks arising from use of stablecoins. These include difficulties with legal certainty, sound governance, AML/CFT compliance, operational resilience (including cyber security), consumer/investor and data protection and tax compliance. If stablecoins reach a global scale, they could pose challenges and risks to monetary policy, financial stability, the international monetary system and fair competition.

Here are a selection of key policy points identified by the G7 Working Group on Stablecoins, highlighting why regulators are so concerned about global stablecoins:

  • Competition: global stablecoin arrangements could achieve market dominance due to their strong existing networks and the large fixed costs that a potential competitor would need to implement large-scale operations, and the exponential benefit of access to data.
  • Stability mechanism: the mechanism used to stabilise the value of a global stablecoin must address market, credit and liquidity risk. If these are not adequately addressed, it could trigger a run, where users would all attempt to redeem their global stablecoins at reference value. Other triggers for a run could include a loss of confidence resulting from a lack of transparency about reserve holdings or if the reporting lacks credibility.
  • Credit risk: global stablecoins whose reference assets include bank deposits may be exposed to the credit risk and liquidity risk of the underlying bank.
  • Increased cost of funding for banks: if users hold global stablecoins permanently in deposit-like accounts, retail deposits at banks may decline, increasing bank dependence on more costly and volatile sources of funding.
  • Change in nature of deposit: in countries whose currencies are part of the stablecoin reserve, some deposits drained from the banking system when retail users buy global stablecoins may be repaid to banks by way of larger wholesale deposits from stablecoin issuers. If banks were to counter this by offering products denominated in global stablecoins, they could be subject to new forms of foreign exchange risk and operational dependencies.
  • Exacerbation of bank runs: easy availability of global stablecoins may exacerbate bank runs in times when confidence in one or more banks erodes.
  • Shortage of high-quality liquid assets (HQLA): purchases of safe assets for a stablecoin reserve could cause a shortage of HQLA in some markets, potentially affecting financial stability.
  • Reduced impact of monetary policy: this could happen in several ways. If, for example, there were multiple currencies in the reserve basket, the return on global stablecoin holdings could be a weighted average of the interest rates on the reserve currencies, attenuating the link between domestic monetary policy and interest rates on global stablecoin deposits. This would be particularly true where the domestic currency is not included in the basket of reserve assets.

The FSB is due to submit a consultative report on stablecoins to the G20 Finance Ministers and Central Bank Governors in April 2020, with a final report in July 2020.

Central bank digital currencies: alternative, interoperable or additional solutions?

Central bank digital currencies (CBDCs) are new variants of central bank money that differ from physical cash or central bank reserve/settlement accounts. There are two potential types of CBDCs: (i) a “wholesale” or “token-based” CBDC – restricted-access digital token for wholesale settlements (for example, interbank payments or securities settlement); and (ii) a general-purpose variant available to the public and based on tokens or accounts, allowing for a variety of ways of distribution.

So how would a CBDC act as an alternative to global stablecoins? A general purpose CBDC would essentially give effect to a disintermediated currency of which the central bank, rather than a private entity, would keep control. The view of the UK central bank, which first raised the possibility of CBDCs in 2015, seems to be evolving. Back in 2018, in his ‘The Future of Money’ speech (March 2 2018), Bank of England Governor Mark Carney identified that a general-purpose CBDC could mean a much greater role for central banks in the financial system. He noted that central banks could find themselves disintermediating commercial banks in normal times and running the risk of destabilising flights to quality in times of stress.

An independent report commissioned by the Bank of England on the Future of Finance noted that there was no compelling case for CBDCs and that the focus should be on improving current systems to allow for private sector innovation. However, in January 2020 the Bank of England announced that it would be participating in a central bank group with six other banks to assess potential use cases on CBDCs.

Payments systems and the transfer technology underlying stablecoins

In his ‘The Future of Money’ speech in 2018, Carney noted the potential for underlying technologies to transform the efficiency, reliability and flexibility of payments by increasing the efficiency of managing data; improving resilience by eliminating central points of failure, as multiple parties share replicated data and functionality; enhancing transparency (and auditability) through the creation of instant, permanent and immutable records of transactions; and expanding the use of straight-through processes, including with smart contracts that on receipt of new information automatically update and if appropriate, pay.

An European Central Bank (ECB) Occasional Paper (‘In search for stability in crypto-assets: are stablecoins the solution?’) notes that: “A platform for the recording of stablecoins and other assets using DLT and smart contracts may either benefit interoperability and competition among different DLT-based infrastructures and issuers – if its governance aims at harmonising the business and technological standards adopted by different operators and issuers competing in the market –, or lead to increased fragmentation if multiple initiatives emerge that compete for the market.”

The Bank of England confirmed in July 2018 that its renewed real-time gross settlement (RTGS) service would support DLT settlement models following a successful proof of concept.

Cryptoassets are a daily reality

The prevailing market views seems to be that in the short to medium term, DLT will augment rather than replace RTGS. Interoperability remains a key challenge, as do the technological and energy requirements of a successful and permanent DLT-based payments system.

Nevertheless, it no longer seems fanciful to talk of cryptoassets forming a daily part of the mainstream payments system. They are no longer only the preserve of speculators, or of payors seeking anonymity. The number of transactions in cryptoassets continues to grow rapidly, and regulators are focused on managing their increasing role in day-to-day financial services. It will be fascinating to see how central banks and regulators continue to respond to the growth of cryptoassets, and where this sector will go next.

In another article entitled, ‘Fintech market enters a new stage of maturity‘, we review macro-developments in Europe.


Clive Cunningham
Clive Cunningham
Partner, London
+44 20 7466 2278
Wendy Saunders
Wendy Saunders
Senior Associate, London
+44 20 7466 2373
Richard Woods
Richard Woods
Senior Associate, London
+44 20 7466 2940

COVID-19: Governance: FCA and PRA publish statements on their expectations for regulated firms under SMCR (UK)

The PRA and FCA have published two statements setting out their expectations on UK-regulated firms under the Senior Managers and Certification Regime (SMCR).

A joint statement from the PRA and FCA has been published for dual-regulated firms (the Joint Statement), while the FCA have separately published a statement for solo-regulated firms (the FCA Statement).

There are also some differences in expectations as between solo and dual-regulated firms to be aware of, which we highlight below in Key expectations.

Next steps

In line with the expectations set out in the statements, firms should:

  • Ensure responsibility for the response to COVID-19 disruption is clearly allocated to an appropriate Senior Manager(s) (SM).
  • Document internally all decisions relating to interim re-allocation of Senior Management Functions (SMFs) and Prescribed Responsibilities (PRs) as a result of temporary absences during this period. Firms should be prepared to share these internal documents with the regulators on request.
  • Communicate material temporary changes to the appropriate regulator promptly (this may not need to be by way of usual SMCR notification forms).
  • Keep contingency plans under review to ensure they remain up-to-date.
  • Take reasonable steps to complete any annual certifications that are due to expire while restrictions are in place.

Key expectations

Allocating responsibility for COVID-19 response

  • Firms are not required to allocate a single SM to be responsible for response to the disruption caused by COVID-19. No “one size fits all” approach is being mandated (with the exception of requiring the responsibility of identifying key workers to be allocated to SMF1 (Chief Executive Officer) – see the FCA and PRA statements for more information).
  • In the Joint Statement, the PRA also recommends that dual-regulated firms consider how they respond to unexpected changes to contingency plans, given the possibility of SMs becoming temporarily absent. Solo-regulated firms should consider doing the same.

Temporary arrangements for SMFs and PRs


  • Where an SM is unexpectedly absent due to illness (or other COVID-19 related circumstances) firms may choose to allocate SMFs to existing SMs. In addition, under the existing ‘12-week rule’, firms may permit an unapproved individual to perform an SMF role where such arrangements are temporary.
  • For solo regulated firms, the FCA intends to issue a Modification by Consent to the 12-week rule to support firms using temporary arrangements for up to up to 36 weeks. This extended period is not currently available for dual-regulated firms (although this position remains under review).


  • The FCA and PRA expect PRs (for both solo and dual-regulated firms) to be allocated to existing approved SMs wherever possible. Where this is not possible (for example due to other SM absences), the PR can be allocated to an unapproved individual performing an SMF’s role on an interim basis.
  • All temporary changes to SMFs or PRs throughout this period should be clearly documented on internal records, including in Statements of Responsibilities (SoRs) and Responsibilities Maps (where appropriate). These records will need to be available to the FCA and/or PRA on request.

Furloughing staff

  • Both statements confirm that furloughed SMs will retain their approved status during their temporary absence and will not need to seek re-approval.
  • Certain ‘required’ functions (such as Compliance Oversight and MLRO) and/or ‘mandatory’ functions (such as the CEO, CFO and Chair of the Governing Body for CRR and SII firms) should only be furloughed “as a last resort”. Firms must arrange cover for those SMFs during the individual’s absence.
  • Firms have greater flexibility in furloughing SMs whose function are not mandatory. However, in the Joint Statement, dual regulated firms are cautioned to think carefully about the implications of furloughing non-mandatory SMFs (such as SMFs responsible for business continuity). Solo-regulated firms should also consider the implications of furloughing key senior staff.

Notification requirements during this period

All firms

  • All firms should update the FCA (and, where relevant, the PRA) by email or by telephone where:
    • unapproved individuals are acting as SMFs under the ‘12-week rule’; and/or
    • SMs have been furloughed.

Firms are not required to submit Forms C, D or J in connection with these temporary absences.

Solo-regulated firms

  • Solo-regulated firms will not be required to submit an updated SoR for approved SMs if a temporary change is made to their responsibilities. However, solo-regulated firms will still need to notify the FCA of the detail of any changes (by email or by telephone) that would normally be included in updated SoRs.

Dual-regulated firms

  • Dual-regulated firms are still required to update and submit SoRs if there are significant changesas soon as reasonably practical”. It is acknowledged in that this may take longer than usual due to current operational challenges.

No change to the obligation to certify staff as fit and proper

  • Dual-regulated firms should take reasonable steps to complete annual certifications due to expire during this period. What might constitute reasonable steps may be altered given the current situation, and certification policies and procedures may need to be adapted.
  • While not specifically addressed in the FCA Statement, in the absence of any new regulatory guidance, the FCA’s expectation appears to be that solo-regulated firms should also take reasonable steps to continue with annual certifications during this period.

Our blog post on the PRA and FCA’s guidance on key workers in financial services is available here, and our general briefing on COVID-19 – Key Issues for Employers is available here.


Clive Cunningham
Clive Cunningham
Partner, London
+44 20 7466 2278
Mark Staley
Mark Staley
Senior Associate, London
+44 20 7466 7621
Patricia Horton
Patricia Horton
Professional Support Lawyer, London
+44 20 7466 2789
Emma Reid
Emma Reid
Associate, London
+44 20 7466 2633