The Bank of England (BoE) has issued a warning to lenders regarding the potential confusion between new forms of digital currency, known as ‘stablecoins,’ and traditional bank deposits. The central bank has urged financial institutions to ensure that customers are not misled by these emerging cryptocurrencies, which are backed by a traditional currency or asset. While stablecoins are still relatively small in comparison to the wider financial sector, regulators are under pressure to monitor developments in retail payments as central banks, including the BoE, contemplate the issuance of their own digital currencies.
In response to these concerns, the BoE and the Financial Conduct Authority (FCA) have proposed a regulatory framework for retail payment systems involving stablecoins and related service providers. This marks the first set of rules in the largely unregulated cryptocurrency sector in the UK. The proposed regulations primarily focus on payment firms, but the BoE has also outlined how banks should handle tokenised deposits if they choose to offer them. The suggestion is that if deposit-takers or their groups wish to issue e-money or regulated stablecoins to retail customers, it should be done through separate non-deposit-taking and insolvency-remote entities.
Unlike cash deposits, which are currently covered by insurance in the event of a bank collapse, separate e-money or stablecoin accounts would not enjoy the same protection. Although no systemic sterling stablecoins currently exist, Tether, the issuer of the world’s largest stablecoin pegged to the US dollar, announced plans last year to launch a sterling stablecoin. Tether has yet to comment on the UK proposals.
The regulators are now seeking feedback on the proposed regulations until February 6, 2024. More detailed draft rules will be released for further public consultation in the second half of the same year, with final rules following at a later date.
Under the proposed regulations, sterling stablecoins would need to be fully backed by deposits at the BoE, with capital requirements in place to address any potential shortfalls. Safeguards would also be implemented to ensure secure storage of these stablecoins by firms on behalf of customers. Customers would have the right to prompt redemptions at par value, although there would be a limit on the holdings to prevent stablecoins from being used for wholesale purposes.
Additionally, arrangers of stablecoins issued overseas would be required to provide the same level of protection for UK consumers as for domestically issued coins. The aim of these regulations is to allow firms to safely and securely utilize stablecoin innovation, as they have the potential to facilitate faster and cheaper payments for all.
While the UK is taking these steps to regulate stablecoins, the European Union has already begun implementing comprehensive rules for cryptocurrencies, including stablecoins, which align with global recommendations.
The proposed regulations serve as a crucial step towards ensuring consumer protection and minimizing risk in the rapidly evolving cryptocurrency landscape. As stablecoins gain prominence and central banks explore the possibility of issuing their own digital currencies, it is essential for regulators to establish a robust framework that fosters innovation while safeguarding the interests of individuals and the broader financial system.
More detail via Kitco.com here… ( Image via Kitco.com )
