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