Cross-authority roadmap on innovation in payments

Introduction

Every day, households and businesses use different forms of money to make payments. As financial regulators, the Bank of England (Bank), Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) regulate systemic payment systems and other firms to ensure that payments can be made safely.

Money performs a number of functions – a unit of account, a means of payment and a store of value – and it takes various forms. There are two forms of money most commonly used in the UK. Public, or central bank, money is a liability of the central bank. It is available to the public in the form of cash. It is also available to commercial banks in the form of central bank reserves. Private money mainly takes the form of deposits in commercial banks – that is, claims on commercial banks held by the public. Other assets such as e-money may be ‘money-like’ in that they are used for payments, and these are subject to regulation to support a stable value.

Regulation and supervision by the UK authorities are designed to minimise potential for customer harm and mitigate the conduct, prudential and financial stability risks posed by the different forms of money and money-like instruments. The Bank and the PRA, in particular, aim to deliver against the principle of ‘singleness of money’. This ensures that all widely used forms of money can be used with confidence, have the same value, are generally accepted as a means of payment and are interchangeable without loss of value with all other forms of money used in the economy, including publicly issued money (cash).

As new forms of money and money-like instruments emerge, along with new types of payment systems, we need to amend the regulatory framework to ensure that risks are adequately addressed while enabling the safe and sustainable adoption of innovation in payments.

Novel technologies and developments in cryptography, tokenisation and programmability now offer the possibility of new business models and the use of new forms of digital money and payment systems. These innovations and business models open the door to major improvements in payment services and the development of new services through greater automation of payments. Reflecting the potential benefits from such innovation, the Bank is considering whether to issue a digital pound, which would be a new digital form of publicly issued money, alongside cash.

New, privately issued forms of digital money and money-like instruments, in use or in prospect, include:

• E-money. Electronic money – or ‘e-money’ – has been available for some time as a money-like instrument to facilitate payments. Recent market developments, however, have given rise to changes in the way it is used in the UK – for example, as a means of savings – and larger-scale e-money firms are emerging to occupy an increasing share of the market, in direct competition with commercial banks.
• Stablecoins. These are a form of digital asset that purport to maintain a stable value relative to a fiat currency by holding assets (which may be of variable value) as backing. Stablecoins may be used for a variety of purposes, including payments or investment. They are at present used primarily for transactions in cryptoasset markets. Subject to appropriate regulation, stablecoins that convincingly maintain their value may in the future be used by many people in the UK for everyday payments.^{footnote [1]}
• ‘Tokenised’ bank deposits. Banks are exploring issuing bank deposits in tokenised form. Tokenisation is the process of representing an asset or form of money on programmable ledgers that enable novel techniques such as atomic settlement and smart contracts.

As this innovation gathers pace, it is important that there is clarity about the regulatory frameworks that will apply to each form of money and money-like instrument, and the payment systems that transfer it. Alongside this paper, the UK authorities have published:

• A Bank discussion paper on the proposed regime for systemic payment systems using stablecoins and related service providers.
• An FCA discussion paper on the proposed regime for stablecoin issuers, custodians and the use of stablecoins as means of payment.
• A PRA letter to UK bank Chief Executive Officers on banks’ innovative uses of deposits, e-money and stablecoins.

By publishing our approach jointly, this enables us to prevent regulatory arbitrage, provide certainty to firms and developers about the regime applicable to them based on the form of money or money-like instrument they want to issue, and maintain the confidence of households and businesses in their ability to make payments on a daily basis.

The regime(s) applicable to firms engaged in issuing different forms of money and money-like instruments and operating payment systems will depend on the purpose of their business, how it is conducted, and the risks it presents. Business models may range from issuing the digital money or money-like instruments with the primary purpose of generating revenue by providing payment services, to business models where revenues are generated primarily through maturity transformation. In the latter case, client funds are received and used to invest in risky assets that offer uncertain returns. E-money institutions (EMIs) are an example of the former business model and banks an example of the latter. These business models take very different types of risk, and this is reflected in the applicable regulatory regime.

1: E-money institutions

EMIs are presently regulated by the FCA for prudential and conduct purposes under a specific regulatory regime set out under the E-Money Regulations 2011 and Payment Services Regulations 2017. This will continue but, as noted in HM Treasury’s recent Call for Evidence, the current e-money regime is likely to be amended as part of the Smarter Regulatory Framework review to enhance consumer protections and strengthen firms’ resilience. This will ensure requirements keep pace with the ongoing evolution of the payments and e-money sector and appropriate prudential standards. The Financial Policy Committee at the Bank of England has also previously noted that the e-money regulatory regime would not meet its expectations if e-money were to be used as a means of payments at systemic scale.^{footnote [2]} In the future, the Bank could regulate systemic payment systems based on e-money, if recognised by His Majesty’s Treasury (HMT). HMT and the Bank are also working on an expansion of the Bank’s systemic payments remit, which would allow the Bank to regulate any payment service providers recognised by HMT.

2: Stablecoins

There are also firms outside of the banking system and existing payment systems that may wish to offer innovative payment services and systems using new tokenised forms of digital money, such as stablecoins.

Recent legislative changes in the Financial Services and Markets Act 2023 (‘FSMA 2023’) provided HMT with the ability to amend the regulatory framework for, and UK regulators to regulate, stablecoin firms.^{footnote [3]}

The FCA’s regime will aim to address the risks of stablecoins that claim to maintain a stable value relative to a fiat currency by holding assets denominated in that currency, when used as money-like instruments, ie for payments (and other uses) at a non-systemic scale. They will regulate, for prudential and conduct purposes, all non-systemic UK-based issuers of stablecoins.footnote [4] It will also regulate custodians of such stablecoins, including those providing custody services from the UK and those providing custody services to UK-based customers. HMT are also exploring how stablecoins issued outside the UK can be safely used in UK payments chains. They have proposed a mechanism of ‘payment arrangers’ where these payments firms assess whether such overseas stablecoins meet prescribed standards before permitting the stablecoins to be used in UK payment chains.

Non-banks may in the future issue stablecoins and operate payment systems that are used, or are expected to be used, for everyday payments at large (‘systemic’) scale. The Bank will regulate such firms that are recognised by HMT, under the regime set out in the Bank’s discussion paper being published alongside this roadmap. Payment systems and related service providers may be recognised from the point of launch if they are deemed likely to become systemic. A core part of the Bank’s proposed regime will be to ensure that stablecoins used in systemic payment systems meet equivalent standards to those expected of commercial bank deposits, in line with the principle of singleness of money.

Stablecoin holders will not benefit from the backstop arrangements that are available for bank deposits, such as deposit protection or a resolution regime. Accordingly, some elements of the Bank’s proposed regime for issuers of systemic payment stablecoins are more robust (for example, capital and backing assets requirements) than those proposed to be applicable to non-systemic stablecoins. This is necessary to ensure an overall level of protections that is equivalent to those that apply to bank deposits.

The Bank’s regime for systemic payment systems using stablecoins is intended for payment system business models that do not involve the payment system or the coins taking credit, liquidity or market risk and which generate revenues from payment services rather than liquidity and maturity transformation. Firms that want to use the funds received from customers to undertake maturity transformation should seek authorisation as banks and be regulated accordingly under the PRA’s existing banking regime. Firms that provide stablecoins with claims of variable value would not be suitable for the Bank’s proposed regime.

Firms under the Bank’s remit may also fall within the FCA’s perimeter for conduct purposes as described above, as well as in the Payment System Regulator’s (PSR) remit, as described in Table A. In such cases, they will be subject to requirements imposed under the relevant Bank, FCA and PSR regimes. Further detail on how dual regulation would work for stablecoin firms is explained in Box A.

3: Tokenised bank deposits

Banks, including those that accept ‘tokenised’ deposits, will continue to be regulated by the PRA for prudential purposes and the FCA for conduct purposes. As set out in the PRA’s Dear CEO letter, banks should ensure that they only provide innovations in digital money to retail customers in the form of deposits, ie as claims on the bank that are protected by deposit insurance. The PRA’s Dear CEO letter also sets out that if a bank wants to issue e-money or stablecoins to retail customers, this should be done from a separate non-bank insolvency-remote entity, with distinct branding to the bank and adequate legal structure to ensure its failure would not adversely affect the rest of the banking group. That entity would then be regulated under the regimes for stablecoins or e-money but would also be subject to the PRA’s existing banking regulation as applied at consolidated-group level.