Both the EU and UK are also bringing stablecoin5 issuers and custodians within the regulatory perimeter. The UK is expected to focus on stablecoins used for payments backed by fiat currencies, while the MiCA will capture a fuller suite of stablecoins backed by either fiat currency or another asset or value. While stablecoins are currently used primarily for settling trades in other digital assets, regulatory clarity could spur new use cases, such as domestic and cross-border account-to-account retail payments.
Their long-term viability will depend on whether the EU and UK launch Central Bank Digital Currencies (CBDCs) over the next three to five years, as expected. More details on potential key features of these CBDCs (e.g., limits on holdings) are likely to emerge in 2023 as both jurisdictions progress their exploratory work. However, our expectation is that any future EU and UK CBDC framework will support coexistence with private forms of money, including stablecoins.
While the key building blocks of the EU and UK stablecoins frameworks are in place, important regulatory details will only emerge in 2023. For example, amendments to the e-money and payment services regimes, which the UK confirmed will form the basis of its regulatory approach. Similarly, the European Supervisory Authorities (ESAs) will have to issue detailed rules under MiCA, e.g. concerning authorisation and liquidity requirements.
Understanding new regulatory requirements, the path to authorisation, and implementing a suitable target operating model will be a priority for newly regulated digital assets firms. But a more developed regulatory environment should also help traditional firms determine their role in the digital assets ecosystem. In some cases, they may also enjoy comparative advantages. For example, under MiCA, e-money institutions (EMIs) and banks will be able to issue e-money tokens through a simpler regulatory notification. Similarly, banks and investment firms could leverage their existing MiFID permissions to provide similar services – e.g. custody or portfolio management – for unbacked digital assets. Firms can also leverage their existing governance and compliance capabilities. However, they will need to strengthen them to address new regulatory requirements and enhanced risks, such as insider trading or market manipulation.