CryptoUK (“we”) and its members welcome the opportunity to comment on the Consultation Paper regarding the FCA’s approach to prudential rules and guidance for the activities of issuing a qualifying stablecoin and safeguarding qualifying cryptoassets. CryptoUK is the UK’s self-regulatory trade association representing the cryptoasset sector. Our members comprise 100+ of the leading companies across the sector and across the UK. Many of our members are also international and engage with regulators and policies on a global basis.

We have provided detailed answers to each question posed in the Consultation Paper within the Appendix.  We seek to offer pragmatic and relevant observations about, and suggestions in response to the content within the Consultation Paper.  However, at the outset, we would like to make a number of general / thematic comments about the Consultation Paper and the FCA’s broader approach to prudential rules and guidance for cryptoasset firms, as follows:

• The proposed COREPRU and CRYPTOPRU rules would (as currently drafted) apply to firms that carry on either or both of the regulated stablecoin issuing and/or qualifying cryptoasset safeguarding activities (in subsequent consultations, we understand that the FCA will expand this to include other relevant cryptoasset activities). However, as various stakeholders have fed back to HM Treasury (“HMT”), the drafting of the legislation that creates these new regulated activities is unclear in some places. This means that there are still questions about exactly when a firm might be “issuing” stablecoins and/or “safeguarding” qualifying cryptoassets. We would therefore like to qualify the views set out in this response by stating that these views would be subject to the review of the final legislation creating the relevant cryptoasset activities, in order to ensure suitable clarity on when firms would be caught by these requirements.
• The Consultation Paper is not clear on whether a transitional period will be made available to firms to enable them to gradually raise the relevant capital, as part of becoming authorised and/or transitioning to the new regime. The lack of a concrete indication of timing and/or an indication that a transitional period would be provided if appropriate is concerning. Firms that have not previously been subject to regulatory capital requirements may be at a competitive disadvantage, and all firms will have to consider whether they will need to restructure their capital positions, which is complex and time consuming and may also be subject to competitive pressures if a number of similar firms are seeking to raise capital at the same time. We would strongly suggest that a transitional period is provided for, similar to those provided under MIFIDPRU (e.g. MIFIPRU TP 2) which allowed firms to gradually increase capital levels over a period of 5 years. We would also suggest that this transitional period be consulted on prior to the finalisation of these rules.
• The Consultation Paper is missing significant parts of how the overall regime will function and currently, only provides a partial view of how the regime would work. In particular, we are still waiting on proposals for how the rules will apply to firms that form part of larger corporate group structures, and for proposals on the Internal Capital Adequacy and Risk Assessment (“ICARA”) process which we understand will be consulted on later in the year or early next year as part of consultations on the final prudential rules. These are both areas which proved to be very complex to implement under the original Investment Firms Prudential Regime (“IFPR”) and which can significantly increase the cost and burden on previously unregulated cryptoasset firms (i.e those that are not subject to an existing regulatory regime). Whilst we acknowledge that these rules are expected to be covered in future consultations, we would caveat responses in this response document to state that the views and opinions expressed herein are subject to reviewing further details of the group and ICARA proposals
• We would ask the FCA for an adequate amount of implementation time and industry support, in the form of roundtables as many firms will be unfamiliar with the regimes and would not have been through this process before. In keeping with the FCA’s competitiveness and growth objectives, we consider this imperative to ensure the larger incumbent firms are not provided an advantageous position compared to firms newer to this process who would also have limited resources to implement.
• The territorial scope of COREPRU and CRYPTOPRU is unclear under the current proposals. A “CRYPTOPRU firm” is defined as a firm with permission to carry on either or both of the regulated stablecoin issuing and/or qualifying cryptoasset safeguarding activities. Although the regulated activity of issuing stablecoins can only apply to a firm which is established in the UK in relation to its UK activities, it is far less clear where the regulated activity of safeguarding a qualifying cryptoasset would be considered to be carried on from a territorial perspective. In addition, it is unclear whether HMT’s draft legislation has correctly defined the territorial scope of overseas firms dealing with UK customers in the manner HMT had originally intended. In theory, there could be certain scenarios in which an overseas incorporated entity may need to be authorised in the UK to carry on the safeguarding activity (or, in the future, another regulated cryptoasset activity, if COREPRU and CRYPTOPRU are expanded to cover those crypto activities too). We would therefore like to seek clarity from the FCA on the territorial scope of these rules and how they would apply to the UK branch of a non-UK entity. For comparison, MIFIDPRU expressly states that it does not currently apply to UK branches of non-UK firms (but that the FCA will look at whether the non-UK firm is subject to a similar prudential regime to MIFIDPRU in its home jurisdiction at the authorisation stage).
• We continue to recommend that policymakers take into account the role of taxation (and its asset classifications) in creating opportunities for clarity, market stability, and economic growth; regulators should not treat it as a siloed area that is not directly and clearly factored into the broader jurisdictional approach to the industry and its activities; stablecoin taxation can be an area of widespread confusion and can be overly complex for retail participants, in particular.
• We would also like to query whether the FCA would consider a carve-out, or separate treatment for stablecoin issuers (compared to other cryptoasset activities) under the prudential framework. We find that some definitions are still incomplete or may have unintended consequences–e.g., “custody”, “custodian”, and “money-like instrument”; in particular, the industry has weighed in very clearly and consistently that the custody-related definitions may be inadequate or have unintended consequences, and should be revisited.
• We also wish to note that the proposals do not specify whether there would be any restrictions on specific currencies or even cryptocurrencies. If the FCA has that in mind, then it would be helpful to provide that clarity here, and to ensure that any such restrictions are aligned with existing regulations. 

Appendix

Consultation Questions:

Do you have any comments on our proposals for the definitions and types of, and deductions from, regulatory capital that CRYPTOPRU firms should use to calculate their own funds?

Alignment with MIFIDPRU

In our view, the most desirable outcome would be consistency with the approach taken in MIFIDPRU. This is because the FCA has only recently consulted on the changes to the capital requirements for investment firms, and MIFIDPRU, as drafted, reflects a regime that has been carefully thought through and consulted on with the investment industry. 

Approach to deductions of holdings being more stringent for cryptoassets than other investments 

There are certain aspects of the proposed rules that would subject cryptoassets to a higher burden than other investments, and as such would not be in line with the FCA’s principle of “same risk, same regulation”, which are as follows: 

• The definition of “connected party” is too broad and the inclusion of cryptoassets issued by employees is not proportionate to the risk that the FCA purports to avoid. The FCA must clarify what types of “employee-issued cryptoassets” would be within scope of deduction, as a blanket rule is not considered to be appropriate and would go beyond what is needed. In addition to this, it is unclear the extent to which a firm would be able to assess whether a shareholder, member, employee (or their close relatives) would have “control of supply” or have “issued” a qualifying cryptoasset. The rules do not specify the level of monitoring or due diligence that would be required in this context. While it might be reasonable to expect a firm to know whether other members of its group or its controllers had issued cryptoassets, the firm may have far less visibility over minority shareholders or the activities of individual employees. We would ask the FCA to provide more clarity on their expectations in relation to this matter.
• Linked to the above, the FCA must ensure that it does not unintentionally bring into scope distributors of cryptoassets (i.e exchanges and intermediaries), by applying a broad interpretation of “in control of the supply”. Further clarity on what this phrase means is welcomed. 

General concerns in relation to deductions of holdings 

Further areas of concern in relation to the proposed deductions of holdings are as follows: 

• The FCA is requested to further substantiate/provide rationale for its chosen approach to deductions, given they go beyond equivalent rules designed to prevent firms “artificially inflating their balance sheets” in relation to cross-holdings of other investment types.
• The rule requiring deduction of the qualifying cryptoassets uses the term “issued”, but this is undefined. It is not clear what this means in the context of cryptoassets, and we would like further clarity on this.
• It is unclear why any concerns about the value ascribed to qualifying cryptoassets could not be adequately dealt with by existing accounting standards and audit requirements. If a legitimate squeeze on supply genuinely increases the value of the cryptoasset, it is unclear why that should not be recognised (subject, potentially, to a prudent adjustment to reflect the unrealised nature of the gain).
• The concept of “control of supply” is unclear. COREPRU 3.3.37G gives some non-exhaustive factors that are relevant to the overall assessment, such as contractual or non-contractual arrangements, or the ability to behave independently of other market participants, however, it does not define the test for assessing whether a person or firm has “control of supply”. We would ask the FCA to provide further guidance on the correct test to be applied, given that this is a trigger for deductions from the firm’s regulatory capital.
• Whilst we understand that this may be outside of the scope of the current consultation, we would ask the FCA to consider in the long term adopting a similar approach to the EU where banks and investment firms are not required to deduct software assets which are “prudently valued” and the value of which would not be expected to be affected by the insolvency of the relevant firm; however, we note that the FCA and PRA have not adopted this approach in the UK. This has created an uneven playing field between UK and EU firms, which may be exacerbated for UK cryptoasset firms under this approach. We would therefore request that the FCA considers a more generous approach to treatment in relation to software, and potentially other intangible assets given the nature of the industry these rules would apply to. This is not only relevant to the cryptoasset industry but more widely across the financial services sector. 

Deductions relating to stablecoins

The FCA should provide clarity on the approach proposed in relation to the deduction from a firm’s own funds in the case of regulated stablecoins. One interpretation of paragraph 3.6 of the Consultation Paper is that the FCA requires a firm to deduct cryptoassets held by a connected party with an exclusion for regulated stablecoins that are fully backed (paragraph 3.7) and implies that firms who are also subject to MIFIDPRU along with the new CRYPTOPRU would be required to make the same deduction. 

The relevance of the connected party is that the deduction applies if either the firm or its connected party is the issuer or otherwise “controls the supply” of the cryptoasset in question. As drafted, COREPRU applies to a UK cryptoasset firm but not (yet) to a MIFIDPRU firm that is not conducting any UK regulated cryptoasset activities. This means that a CRYPTOPRU firm that was also a MIFIDPRU firm would be subject to two different sets of capital eligibility rules (MIFIDPRU 3 and COREPRU 3) in parallel. Although these rules are very similar (and will be more so if the FCA adopts the proposals in its separate consultation in CP25/10 to amend MIFIDPRU 3 further), because COREPRU 3 does not require the deduction of fully backed qualifying stablecoins, the position under MIFIDPRU 3 is far less clear. The FCA should look at other regimes such as MiCAR ensure that the exemption from deduction of holdings of UK regulated stablecoins is also available to stablecoins issued under equivalent regulatory regimes.  

There is no express deduction of qualifying cryptoassets under MIFIDPRU 3. Whilst qualifying cryptoassets such as BTC and ETH are considered intangible assets, stablecoins may be classified as ‘financial instruments’ in accordance with IFRS 9 or FRS 102 even if not necessarily within the definition of a financial instrument within MIFID. Some members believe that this complexity may be resolved if the FCA subjects MIFIDPRU firms to COREPRU, however on the basis that all MIFIDPRU firms have the ability to consult on the application of COREPRU before being subjected to this regime. 

However, this point is not clear and as such we would like to seek clarity on whether a CRYPTOPRU firm that is also a MIFIDPRU firm might still need to deduct a qualifying stablecoin under MIFIDPRU. Additionally, we request further clarity on whether COREPRU 3.3.36R(2)(a) can also be interpreted as confirming that a qualifying stablecoin should not be treated as an intangible asset for these purposes (and therefore would not be deductible under COREPRU 3.3.21R or MIFIDPRU 3.3.6R(2)). 

Furthermore, some members consider that FRS coins such as BTC and ETH which are not redeemable are intangible assets within MiFIDPRU or COREPRU, and not within IFRS or UK GAAP.  Any asset referenced token which is redeemable as a financial instrument is not intangible and not a defaulting as a CET1 deduction. 

If the first interpretation is in fact correct, then we would note that stablecoin issuers  which are regulated in the UK (or an equivalent jurisdiction) should  hold cash and/or a high quality short-term government debt issued by a level 1 government within their backing pool and therefore should be able to contribute towards the overall capital base of a firm in the scope of both CRYPTOPRU and MIFIDPRU.

In either instance there appears to be some lack of clarity and, as such, further clarifications from the FCA to confirm the position in relation to the interpretation of this section would be welcomed. It may be relevant to note here that the classification of stablecoins under current accountancy standards globally is varied (whereby a stablecoin holding can be either intangible assets or financial assets, depending on all of the facts and circumstances). As such, additional clarity on the appropriate approaches to deductions is very much required. 

Do you have any views on our proposed requirements for deductions from CET1 capital, in particular cryptoassets held by firms which they have issued or are in control of the supply of?

Only in reference to the point mentioned in our response to Q1. Deductions from connected parties, in particular employees, are not relevant. In relation to UK-regulated stablecoins, if the former interpretation is the correct one then we would ask that UK regulated stablecoins (or issued under equivalent regimes) should not be deducted. 

Do you have any comments on our proposed overall approach on the Own Funds Requirement (OFR), and the detailed provisions of the specific components: (i) PMR, (ii) FOR, (iii) K-SII, and (iv) K-QCS?

Whilst the overall approach and proposal seem to be aligned with the earlier discussion paper on this topic, and the current regulations concerning MIFIDPRU firms, we have provided additional comments on specific points below.

Own funds requirements 

In relation to the own funds requirements, we are broadly happy with the FCA’s proposals here. 

Permanent minimum capital requirement

In relation to the permanent minimum capital requirement (“PMR”) points set out in the Consultation Paper, we agree that the PMR for issuing qualifying stablecoins should be akin to e-money issuers and that £150,000 PMR is appropriate for firms that safeguard cryptoassets. We remind the FCA that the must consult on the PMR for other cryptoasset activities as soon as possible, so that firms are able to prepare and raise the relevant capital as part of future-proofing their businesses. 

Fixed overheads requirement

In relation to the fixed overheads requirement (“FOR”), most  members are happy with the FCA’s proposals here. 

K-Factors 

In relation to the K-factor for qualifying stablecoin in issuance (“K-SII”), we note that the proposed definition of “SII” refers to the qualifying stablecoins that the issuer is liable to redeem. It is not entirely clear, based on the definition and calculations at CRYPTOPRU 4.5, if the value referred to in this section is intended to be the notional value of the stablecoins in issuance or the actual market value of such stablecoins. While the purpose of a stablecoin is to maintain a stable value and therefore, these two values are expected to be the same in most cases, there are presumably situations in which these values may diverge, such as in the case of a temporary shortfall in backing assets. We would therefore ask for clarity from the FCA in relation to which value should be used for the purposes of calculating the K-SII and note our preference is for the notional value based on operational implementation.  

Furthermore, in relation to the K-SII, we consider that 2% of the average qualifying stablecoin in issuance is too high, given the existing requirements for backing assets (such as it being 1:1, specific composition and liquid asset requirements). The figure should be much less. 

In relation to the K-factor for qualifying cryptoassets safeguarded (“K-QCS”), we understand that the proposed definition aims to address the risk of firms not correctly overseeing harm resulting from the use of a third party for safeguarding purposes (see paragraph 4.43). However, if the firm uses a third party which is a regulated firm in its own right, we do not agree that the level of risk would be the same as it would be for a firm safeguarding the cryptoassets itself. In such instances, we would recommend a considerably lower level of QCS to be required than the proposed 0.04% (we do note however that the stated intent is that the K factor would only be binding for the largest firms).

We would also like to raise several issues in relation to the proposed calculations set out in the Consultation Paper, as follows:

• K-QCS calculation: One of the potential issues with the calculation for K-QCS is that the regulated activity of safeguarding qualifying cryptoassets is not clearly defined in HMT’s draft legislation. For example, stakeholders have pointed out that the definition of K-QCS, which refers to “control” (which itself is defined non-exhaustively in the legislation) is wide and could be read as covering title transfer arrangements (already noted in the response) and other cryptoasset lending arrangements. Although this is outside the FCA’s direct remit (because HMT will need to address it in legislation beforehand), without clarity, some firms may struggle to confirm which data points need to be included in the calculation of the K-QCS value. If there is any uncertainty in relation to whether certain qualifying cryptoassets are held in the course of carrying out the safeguarding activity, CRYPTOPRU 4.4.3R requires the firm to include such cryptoassets in the calculation of K-QCS (which mirrors the approach adopted under MIFIDPRU). However, the relevant rule in MIFIDPRU related to a well-established regime under MiFID. The implementation of the same rule may be problematic under CRYPTOPRU considering that the safeguarding activity is new and there may be no market consensus on what it does and does not cover. We would ask that the FCA works with HMT to clarify this point and to address this in any perimeter guidance published in connection with cryptoasset activities).
• QCS definition: The proposed definition of “QCS” is the “value of qualifying cryptoassets safeguarded”. Under the proposed wording of CRYPTOPRU 4.4.8R, to measure QCS, the FCA has suggested that firms must use either the market value of the qualifying cryptoassets or, if that is not available, an alternative measure of fair value, which could include an estimated value calculated on a best-efforts basis. In almost all instances, organisations providing cryptoasset custody would be doing so in relation to cryptoassets acquired and traded on cryptoasset platforms, such that there would generally be an observable market value. However, whilst not explicitly set out in the rules, the proposed wording suggests that  there is a requirement on  firms to be able to estimate fair value if a cryptoasset was removed from an exchange for any reason and/or if they provide custody services for more exotic cryptoassets that are not traded on a publicly observable exchange. We would ask for the FCA to elaborate on how this fair value approach could be addressed in such a scenario as there is not a sufficiently clear methodology and we can not anticipate an alternative scenario.
• QCS volatility: The K-QCS calculation uses broadly the same methodology as the K-ASA calculation for MIFIDPRU firms (i.e. the arithmetic mean of the end of day values across the last 9 months, excluding the most recent 3 months). We note that it is possible for the QCS measure for cryptoassets to be significantly more volatile than the equivalent assets safeguarded and administered (“ASA”) measure for traditional securities, given some of the previously observed swings in some cryptoasset prices. Although this may lessen as the crypto market matures, we would ask if there were consideration of a longer calculation period to help smooth out the effects of high volatility in the underlying data points. We acknowledge that this would require firms to collect more data points, however, this may help prevent sudden jumps in capital requirements due to large upswings in safeguarded asset values.
• Volatility of transitional measures: The transitional arrangements under CRYPTOPRU 4.4.10R and 4.6.12R may also lead to the calculation of highly volatile values for newly established firms or firms transitioning into the regime for the first time, as they reduce the number of data points and do not incorporate the time-lag effect for the first 6 months. We note that this approach was also used under MIFIDPRU, however, traditional securities could be considered as a less volatile asset class and so the risk of large swings may have been somewhat lower there.
• Advance data collection: When the IFPR regime was established, the FCA had required firms to collect at least one month’s worth of data for relevant K-factors before the new rules began to apply. In relation to both QCS and SII, we request clarity from the FCA on whether there will be a requirement on firms to engage in any advance data collection before the new prudential regime goes live.

Do you have any views on the items to be deducted from total expenditure when calculating the FOR, are there any others that may be relevant for cryptoasset firms and if so, why?

Given these broadly mirror the requirements set out in MIFIDPRU 4.5.3R and the draft CRYPTOPRU rules contains a catchall clause for all deductions applicable to MIFIDPRU investment firms, we have no additional comments on this.  

Some members are however of the view that the FCA should not prescribe an exhaustive list of deductions from the FOR but rather leave this at a firm’s discretion to determine whether a deduction is appropriate or not. 

Do you agree with our proposal that the value of qualifying cryptoassets appointed by or to a third-party custodian for the purposes of safeguarding must be included in the measurement of QCS? If not, how else would you suggest that the risk of potential harm from the use of third parties is mitigated?

We do not agree with this proposal. We note that, where the third-party custodian is regulated by the FCA (or where it is subject to equivalent regulatory and prudential requirements in another jurisdiction) then qualifying cryptoassets appointed by or to a third party custodian for the purposes of safeguarding  would in effect constitute the QCS of the custodian. Including such assets in the calculation of the firm’s QCS would effectively lead to the double counting of capital requirements. Whilst we appreciate this is similar to the existing approach under MIFIDPRU, we consider changes are required for cryptoasset firms because we believe this is also not appropriate in other sectors. We believe this is effectively double counting and if the custodian or  third party is regulated then there needs to be some cover for the risk associated with the oversight of this but not at the level set out in the paper. We would recommend that the FCA considers either eliminating this or proposes a lower rate. The cryptoasset market operates differently to other markets and we want to ensure there is no overlap in any of the positions or unnecessary burdens applied to the industry.

We would also refer back to our earlier comments made in relation to Q3 of this Consultation Paper and note that we understand that the FCA’s future consultation paper into Operational Resilience & Consumer Duty (as part of the conduct and firm standards consultation paper for cryptoassets, which is due to come out in quarter 3) is expected to address the use of third parties and associated risks.

Do you agree with our proposals on the basic liquid asset requirement (BLAR)?

We largely agree with these proposals. However we request an explanation as to why trade receivables (which are included in MIFIDPRU’s list of core liquid assets) have been omitted from the list of core liquid assets in the draft CRYPTOPRU rules (at paragraph 5.10 of the Consultation Paper). 

As part of the BLAR, can you identify any circumstances where the provision of guarantees provided to clients by firms might apply to cryptoasset custodians or qualifying stablecoin issuers?

We note that there had been uncertainty (under IFPR) in relation to the  term ‘guarantees provided to clients’ and whether this could be interpreted as the client necessarily  being  the beneficiary of the guarantee, or whether a guarantee of an obligation of the client given to a third party would also be covered. If the latter is the correct interpretation, then this gives rise to concerns around the inclusion of activities of exchanges and trading platforms, who may, under the terms of membership of the venue, be interpreted as providing a guarantee in relation to the settlement of specific transactions. We would seek clarity from the FCA on the correct interpretation of this term.

Additionally, we also consider that operational warranties should be excluded from the scope of the BLAR. We envisage a scenario where the above response needs to be revisited in the future, when additional cryptoasset activities are covered under the regime   beyond stablecoin issuance and safeguarding of qualifying cryptoassets, but we would need to consider this as part of any future consultations with the FCA. 

Stablecoins are implicitly guaranteed to be redeemable at par.  The rules should make clear that such a guarantee is not in scope of BLAR as the body of the rules exists to ensure the issuer is able to support this.

Do you agree with our proposals on the issuer liquid asset requirement (ILAR) to address price risk when government debt instruments are held in a backing pool (either directly, or indirectly in connection with certain funds and repo/reverse repo transactions)? If not, please explain why you do not agree with specific aspects and what alternative solutions would you suggest?

We have reviewed the potential quantitative impact of the ILAR based on the application of the draft rules to any actual or expected backing pool. In this instance the ILAR charges, as set out in CRYPTOPPRU 6.1.11R, seem disproportionate, and to some members view, unnecessary (given the BLAR and the restrictions around core liquid assets). The calibration of the ILAR does not seem to be workable without assessing the impact on a concrete pool of backing assets. We also consider that some of the asset charges in the table in CRYPTOPRU 6.1.1R are too large – e.g. up to 30%, especially for backing assets with a long maturity.

Assuming that the requirement is to cover short term liquidity as a result of market price changes.  Taking level 1 assets as an example, the DV01 which is a basic risk measure, on a 3-month UST would be in the region of 0.0025%.  The stress of 0.20% would imply an 80bp rate move during the reporting window, which is a large move.  A four-year government bond issued at par would have a DV01 of c0.00037%.  The stress of 2.25% would imply an even more extreme market move.We would ask the FCA to provide more data on how this requirement was calculated.

Overnight reverse repo on government debt is an overnight secured loan.  A liquidity analysis based on the underlying bond is irrelevant unless the counterparty has defaulted.  Furthermore term repo is margined so any change in value of the bond would be captured in that process.  On this basis a ILAR requirement determined by the maturity of the underlying collateral is neither necessary nor proportionate.

It appears there may be a divergence in FCA policy as the definitions are not consistent in terms of the approach and we would seek clarity on the correct policy position here. 

In the ILAR requirements for level 3 assets, it is currently unclear why the table in CRYPTOPRU 6.1.11R has a column only for these assets where there is no coupon. Within the proposed definitions, a ‘level 3 asset’ is a short-term government debt instrument issued by a member of the OECD that is not listed in the level 1 or level 2 definitions. It is a possible scenario that such assets could still have a coupon, in which case the proposed wording would be unclear as to which charge would apply under the relevant table. If the intention is that the term ‘no coupon’ is intended to mean ‘irrespective of coupon’ then we would ask the FCA to confirm and clarify this definition.

Do respondents consider that the foreign exchange risk for qualifying stablecoin issuers described in paragraph 5.22 needs to be addressed through minimum requirements, for example would a specific capital charge be appropriate?

The FCA states in paragraph 5.22 that the ILAR would expose the firm to foreign exchange risk where the firm issues a qualifying stablecoin in a currency other than its functional/issued currency. It is unclear why this is a cause of concern for the FCA, as under the proposed rules (CP25/14, CASS 16.2.15R) all money and assets in the backing pool for a qualifying stablecoin are required to be in the denominated reference currency of the stablecoin. CRYPTOPRU 6.1.12R(2) requires that the on-demand deposits that are held to meet the ILAR must also be denominated in the reference currency of the stablecoin. As such, there would not be any instances of an FX mismatch between the on-demand deposits held to meet the ILAR and the potential expenditure that might be required to top up the backing asset pool.

Note, some members do not agree that backing assets should be held in a different currency as this introduces risk to the pool which increases reliance on the issuer.

We acknowledge that the conversion of the on-demand deposits into the functional reporting currency of the firm will be subject to fluctuating FX rates, however, as the firm cannot use the on-demand deposits to meet the ILAR for any other purpose than the topping-up of the backing asset pool, this would not give rise to any material FX risk.

Finally, please see our comments on Q2 and Q6 of CP 25/14 where we also discuss this point in further detail.

Do you have any comments on the proposal for monitoring and control of concentration risk? Please provide suggestions for any specific clarifications that you feel may be helpful.

In principle we agree with the proposal however we would like to note the following points:

• We have some concerns in relation to the benefits of monitoring concentration in the source of earnings. The definition of “earnings” in CRYPTOPRU 5.1.2[G] is not clear in the context of a stablecoin issuer. We ask the FCA to provide guidance as to how this would work in practice. For example, if a stablecoin issuer’s income derives from backing assets would they have to take into account the issuer(s) of those backing assets in their concentration risk? This does not seem to make sense, given that risk is dealt with by other means.
• We note that there may be significant concentration risk relating to banking exposures for both the firm and the backing asset of the coin, as many banks in the UK and overseas are unwilling to provide services to cryptoasset and digital asset firms (regardless of the regulatory status of the firm). While firms may seek to reduce concentration risk, this would still be wholly dependent on the willingness of banking providers to support this sector. We would therefore ask the FCA once again to provide proactive support to the industry by establishing a regulatory provision to ensure access to a suitable and diverse group of established and reputable banking providers to ensure the sector is not disadvantaged by the unfavourable treatment of the banking service providers in the UK.

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