UK Regulators & Stablecoins: What Businesses Can Do to Reassure Consumers

The financial watchdogs are circling the crypto market. Recent meetings from the UK's Financial Policy Committee (FPC) in early April laid bare a growing unease over the crypto industry's expanding footprint. Stablecoins, and their interconnectedness with the “real economy”, took the brunt of the scrutiny.

While the FCA has been relatively positive (but also firm) over crypto’s future, stablecoins carry a completely unique, separate concern for regulators. This isn’t just the UK that’s concerned, but the European Securities and Markets Authority recently shared similar warnings.

Why are regulators worried?

It’s important for crypto project founders and stakeholders to understand regulators' anxiety. The UK's FPC meeting is highlighting that crypto-asset markets, which are historically volatile, are becoming more intertwined with the conventional financial system, which underpins the global economy (and therefore, the welfare of the world’s citizens).  

They concede the link is "relatively limited", yet share fears about wider economic stability should the crypto markets falter. In particular, though, are stablecoins, which are being put under the microscope. This is in part due to the way they’re treated and perceived (e.g. not as a high-risk speculative investment, which is how much of crypto’s market capitalisation is traded). In some ways, being openly high risk or speculative is safer, because this is how they’re spoken about and disclaimed.

Regulators stress that their resilience hinges entirely on the quality and liquidity of their backing assets. This is needed to ensure redemptions can always be met at par, even during market stress. Given the way they’re marketed, alarm bells were rung over the rise of issuing sterling offshore stablecoins “with inappropriate backing assets". 

This highlights that, while the FCA is actively managing high-risk crypto investments, they’re at least confident in this perception (and punish marketing promotions that deviate from this outlook). So, what the FPC worries about is "currency substitution", which is very different.

Beyond the risks of not truly being able to fulfil redemptions as promised, there’s a broader concern. If stablecoins are pegged to foreign currencies and become widely used, it could undermine the effectiveness of domestic monetary policy (the BoE only recently cut interest rates again, and recent reports of economic growth suggest they’re related). 

ESMA fears "knock-on effects" from crypto price shocks may impact the established financial order. Ultimately, these aren't attacks on innovation, but a reminder of the bigger picture, which isn’t just to protect individual consumers but macroeconomic financial stability. 

Why businesses shouldn’t remain silent

Regulatory warnings aren't just abstract noise or bureaucratic compliance that must be overcome. The most immediate impact of these statements is the potential erosion of consumer trust. These messages are reported by a wide range of publications with high readership, and this can spook users who fear the worst. In conjunction with broader geopolitical and economic instability, these warnings can further push people towards safe, age-old investments like gold and US stocks.

There can be concerns over both operational friction due to changing regulations, and the impact this may have on UK-based projects. Banks may become warier, while fintechs may be less likely to collaborate with DeFi projects. Ignoring these concerns is not a viable strategy, and businesses should shift from a reactive stance to proactive engagement. 

Communication strategies for reassurance

In the face of regulatory headwinds, crypto businesses need to engage with their community. This shouldn’t just be in the form of marketing communication alone, but in displaying radical transparency, particularly for stablecoin projects. 

Issuers need to clearly explain precisely how their stablecoin is backed, be it in cash, bonds, or other assets. Importantly, there must be frequent links to independently verified attestations or audits that confirm these reserves. On top of that, the redemption process should be clearly outlined. The same goes for exchanges using stablecoins, as they should take responsibility for the stablecoins offered and link to the issuer's transparency data. Ideally, they will outline their own due diligence process for selecting those assets, too.

The idea is not to be dismissive or defensive over regulator claims—after all, you’re going up against very experienced professionals who are experts in their own comms. Instead, take on an educational role, and this begins by acknowledging the regulators' statements and concerns. They’re legitimate points for discussion, and this isn’t a culture war. 

Accessible content like blog posts, FAQs, and infographics can be used to explain how stablecoins work more broadly, their inherent risks, and, only then, to lay out your specific measures taken to mitigate these risks. If concerns about currency substitution continue to heat up, clarify the intended use cases on your platform, or put together a whitepaper explaining the stability benefits of introducing stablecoins to the mainstream financial system. 

Last of all, highlight the compliance and risk management work you’ve been putting in. It’s not enough to simply remain compliant, but to communicate your adherence to these existing rules, like AML, and show internal security frameworks. And, importantly, don’t just speak to UK regulators, but also internationally relevant ones like the ESMA’s concerns.

Actions speak louder than words

Empty promises and unbacked claims will be dissected and dismantled by the enthusiast community, particularly in a time where their communication is seamless via social media, be it commenting under your posts or within their own internal community channels.

Spin won't suffice; it’s not just the regulators you need to stay on the good side of.

Independent verification is where most of your reputation is built, as reputable, third-party auditors can scrutinise stablecoin reserves and the platform’s security. Of course, these must be published where users can easily find them.

For stablecoin issuers, conservative reserve management may be wise during periods of high scepticism. High-quality, highly liquid assets like cash and short-term government securities can be prioritised, while risky or illiquid assets can be avoided in a 1:1 pegged stablecoin. This essentially directly addresses the FPC's core concerns regarding inadequate backing. 

Building trust 

Heightened regulatory scrutiny, particularly around stablecoins, presents a challenge to both your operations and market sentiment. However, it also presents an opportunity, as it can be a space for a reply—to demonstrate audited reserves and radical transparency. For help conducting your marketing promotions, Englebert can advise on strategy and compliance.