Bank of England Publishes Plans to Regulate Stablecoins

An illustration picture shows gold plated souvenir cryptocurrency Tether (USDT), Bitcoin, and Ethereum coins arranged beside a screen displaying a trading chart, in London on May 8, 2022. Justin Tallis/AFP via Getty Images

Plans to regulate stablecoins have been revealed amid the UK government’s attempt to safeguard the widespread use of digital assets.

The Bank of England (BoE) and the Financial Conduct Authority (FCA) have requested feedback from the public and the industry on their approach to regulating stablecoins.

Stablecoins are cryptocurrencies designed to have a stable value relative to traditional currencies or to a commodity such as gold. They provide an alternative to private, decentralised digital currencies, such as Bitcoin.

The use of cash has been steadily declining and new forms of digital assets are more readily available for households and businesses, BoE Governor Andrew Bailey said in a foreward to a discussion paper.

Stablecoins are a form of digital asset that could be used for everyday payments and make them cheaper and faster. It could be used to enhance digital retail payments in the UK, said BoE Deputy Governor Sarah Breeden in a press release.

The bank and the FCA want to “harness” the benefits of stablecoins for UK consumers and retailers. The institutions published their proposals on the regulation of stablecoin in two discussion papers.

“Our proposals aim to support safe innovation so that firms can understand the risks they need to manage and ensure that the public can be confident in all forms of digital money and payments,” said Ms. Breeden.

Discussion Papers

The FCA’s paper includes proposals on how to issue and hold stablecoins to maintain a stable value relative to a fiat currency, such as the British pound, by holding assets denominated in that currency.

To operate in the UK, stablecoins must identify a “payment system operator” responsible for assessing risks arising from the different parts of the payment chain. This entity should be recognised by the Treasury.

Customers would store their stablecoins in digital wallets and their value should never deviate from the fiat currencies to which they are pegged. Wallet providers would be required to allow customers to redeem stablecoins at “par value” at all times.

“In order to be used at systemic scale, any such payment system would have to assure us that a legal entity or natural person could be held accountable and responsible for end-to-end risk management,” the BoE said.

The BoE’s paper explains how the bank would regulate systemic operation of payments using stablecoins. The bank would also regulate other companies providing services in these payments, such as stablecoin issuers and wallet providers.

The bank supports “safe innovation” so that firms understand the risks posed by stablecoins and other forms of digital money and payments.

The BoE paper was published alongside a letter from the country’s Prudential Regulations Authority (PRA) to deposit-takers.

The PRA said that the protections available to traditional deposit takers differ from those available for stablecoin users.

“Contagion risks will be lower for stablecoins used in systemic payment systems regulated by the Bank, than for e-money or other regulated stablecoins captured by the FCA’s regime,” the letter said.

The deadline for responses to both papers is Feb. 6, 2024.

Among the disadvantages of stablecoins are the counterparty risk that emerges when the issuer is not able to honour their obligations. In addition, there are risks associated with the volatility of the asset and its liquidity.

The Treasury intends to have fiat-backed stablecoins defined in legislation. The Payment Services Regulations 2017 will regulate their use in payment chains, the Treasury confirmed in October.

The Treasury plans to bring forward secondary legislation as soon as possible and by early 2024, which will enable the FCA to regulate activities related to fiat-backed stablecoins.

The government has been developing plans to make the UK a global hub for crypto-asset technology for a few years.

Legal recognition of stablecoins as a valid form of payment has been part of the overarching government strategy to “robustly regulate cryptoasset activities.”