<\/p>\n
The Prudential Regulation Authority (PRA) has sought to head off consumer confusion and possible contagion risks for deposit-takers from e-money and stablecoins in a recent letter reaffirming its expectations on innovations in the use of deposits, e-money and stablecoins.<\/p>\n
The letter<\/a> (11 pages \/ 309KB PDF), which was sent to chief executive officers of all banks and designated investment firms across the UK, clarifies that, for deposit-takers, stablecoins and e-money are to be issued by a separate, non-deposit taking, insolvency-remote entity with its own distinct brand distinguishing it from the deposit taker<\/p>\n The PRA says the letter focuses on risks linked to the retail market, highlighting particular concerns over potential \u201crisks of contagion\u201d if deposit-taking entities offer e-money or stablecoins under the same branding as their deposits. \u201cPast experience, including as recently as the March 2023 banking turmoil, indicates contagion can happen quickly and is very difficult to reverse once it takes hold,\u201d the letter warns. \u201cAs such, the PRA\u2019s expectations are intended to help mitigate this risk, especially given the speed with which information can now be proliferated.\u201d<\/p>\n From a product perspective, the PRA outlines clear pointers for senior management and compliance teams, including the expectation that both the name and presentation of e-money or stablecoin products are clearly differentiated from retail deposit products.<\/p>\n The letter also makes it clear that while the PRA expects deposit-takers may innovate with the form of deposits \u2013 for instance, tokenised deposits \u2013 they must ensure that innovation in the form of deposits is the only monetary innovation they provide to retail customers. The PRA also expects that deposit-takers\u2019 innovations with deposits from retail customers meet the PRA\u2019s rules for protecting depositors under the Financial Services Compensation Scheme (FSCS).<\/p>\n If deposit-takers or their groups want to innovate with the issue of e-money and stablecoins, the regulator said this should be conducted from a different entity that is not a deposit-taker, is insolvency-remote and has its own distinct branding.<\/p>\n Commenting on the PRA\u2019s latest letter, David Heffron<\/a>, financial services regulation expert at Pinsent Masons said: \u201cProtecting the deposit taking activities and the wider deposit-taking group from adverse impacts if the e-money or stablecoin issuing entity runs into difficulties, or fails, is described by the PRA as the \u2018key outcome\u2019 it expects firms to achieve. Structuring the group so the issuer is insolvency remote is part of this, as is seeking to prevent what the regulator calls \u2018contagion in confidence\u2019 at the retail market level, by clearly distinguishing in the eyes of consumers the stablecoin or e-money issuing activities of the group from the deposit-taking business\u201d.<\/p>\n According to the PRA, such \u201cbehavioural risks\u201d are relevant because protections for retail holders of e-money and stablecoins are deemed \u201cmarkedly\u201d different from those for deposits, which are protected by the FSCS. If deposits and types of digital money which are not FSCS-protected are issued under the same brand, issues with the e-money or stablecoins could cause loss of confidence in deposits, and vice versa, the PRA\u2019s letter explained.<\/p>\n Heffron added: \u201cThe PRA is writing again to reaffirm its expectations for how deposit takers and deposit taking groups that wish to innovate with deposits, stablecoins and e-money are to mitigate risks of confusion and contagion in the retail market, and to give further details in view of new business models and technology now being deployed. The PRA\u2019s letter emphasises its expectations do not replace existing regulatory requirements for deposits, e-money and stablecoins.\u201d<\/p>\n The PRA says firms must ensure customers receive \u201cclear, prominent and ongoing information about the different protections that apply\u201d and that its supervisors will consider the \u201coverall customer experience\u201d when assessing differentiation between stablecoins, e-money and retail deposits by banking groups which issue e-money or stablecoins.<\/p>\n Josie Day<\/a>, a financial services regulation expert at Pinsent Masons, said the PRA is expecting banking groups \u201cto draw a very clear dividing line\u201d between the stablecoins and e-money they issue and their retail deposits business. The PRA\u2019s letter says there may be a range of approaches firms can take.<\/p>\n Day added: \u201cFirms should be considering not only the areas the PRA\u2019s letter refers to specifically \u2013 notably name, branding, how customers access the product and information about it \u2013 but this suggests they also need to be thinking more broadly about how to differentiate from their retail deposits business the whole \u2018look and feel\u2019 of the e-money and stablecoin products they issue, throughout the retail customer journey and lifecycle of these products.\u201d<\/p>\n Disclosures, warnings and on-boarding as well as customer education have an \u201cimportant supporting role\u201d the PRA\u2019s letter said, but it also warned firms not to rely on these as the only way of mitigating risks of confusion by retail customers.<\/p>\n In light of recent innovation in money and payments, this letter supersedes an earlier \u2018Dear CEO\u2019 letter issued in 2023<\/a> that set out the PRA\u2019s expectations then in these areas. Recent developments include the emerging new stablecoin regulatory regimes in the UK<\/a>\u00a0and globally, as well as the use of tokenised deposits. The current letter also points to secondary legislation passed in February 2026, which enables the regulation of stablecoins and cryptoassets in the UK.<\/p>\n The PRA recommends that banks read the latest letter in tandem with a \u2018Dear CEO\u2019 letter sent to banks last month on the prudential treatment of bank’s cryptoassets exposures<\/a>, updating firms and replacing the regulator\u2019s previous expectations in an earlier letter<\/a>.<\/p>\n The regulator said its expectations outlined in the May 2026 prudential letter would continue to apply \u201con an interim basis\u201d until the PRA publishes its proposed future prudential\u00a0framework. The PRA said it would consult on a proposed framework in 2028 \u201cat the earliest\u201d. <\/p>\n","protected":false},"excerpt":{"rendered":"
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