PRA has written a Dear CEO letter to provide clarity on the ways in which it expects deposit-takers to address risks that arise from issuing multiple forms of digital money, while welcoming the benefits that could come from innovation and competition in this area. The letter supports the BoE and FCA discussion papers and aims to address the risks that may arise in relation to the availability in parallel of deposits, e-money and regulated stablecoins to retail customers.
Deposit-takers are expected to mitigate the risk of contagion if customers, especially retail customers, get confused if deposit-taking entities offered e-money or regulated stablecoins under the same branding as their deposits. Retail holders of e-money or regulated stablecoins might mistakenly assume that they have the same protections as retail depositors. The letter suggests that firms mitigate this risk in the following ways:
- Deposit-takers should ensure that deposit-taking entities only provide innovations in digital money to retail customers in the form of deposits – if they want to offer e-money or regulated stablecoins to retail customers, they will need to do so through a separate, non-deposit taking and insolvency remote vehicle;
- Where a firm without a deposit-taking permission has issued e-money or regulated stablecoins to retail customers and seeks a deposit-taking permission, they will need to transition their UK customers to deposits at the new deposit-taking entity as soon as possible;
- Where a deposit-taker intends to innovate in the way that it takes deposits from retail customers, this should be done in a way that meets PRA’s rules for eligibility for depositor protection under FSCS;
- Deposit-takers must ensure they meet the single customer view and exclusions view requirements in respect of such deposits.
International deposit-takers with UK branches, or those seeking to open them, should read the letter in conjunction with PRA’s expectations for international deposit-takers that engage in retail activities.
The letter also sets out PRA’s broader expectations for banks regarding their use of digital money for retail or wholesale innovations, in areas such as operational resilience, anti-money laundering, counter-terrorist financing, and liquidity and funding risks.