DEFI

Bank of England Hints at Stablecoin Regulation

The Bank of England (BoE) published a report on Thursday (March 24) suggesting that a new legal framework to regulate crypto assets is needed, but most notably, the report focuses on stablecoins and the need to bring them under the Bank´s remit to control any possible systemic risks.

In the first part of the report, the BoE describes the role of crypto assets and decentralized finance (DeFi) in the financial system. In view of the Bank, these assets are still small to cause any disruption in financial markets, but its growth suggests that legal frameworks should be in place to mitigate potential systemic risks. However, there is no indication about the type of regulation that should be adopted. The message from the BoE sounds more like a warning than an action plan to develop specific regulations, at least for most of the crypto assets and DeFi products.

However, the story may be different for stablecoins. The BoE seems to have a clearer idea of the risks for systemic and non-systemic stablecoins and how regulation should affect banks and non-banks if they decide to offer stablecoins.

“This creation of money-like instruments for transactional purposes poses potential risks that go beyond those usually associated with existing payment systems. It is necessary therefore to ensure that in addition to the risks of the payment system itself, the risks of this money creation aspect are also managed,” the BoE said in the report.

The BoE uses the European Union’s Markets in Crypto Assets regulation and the U.S. President’s Working Group to suggest that stablecoins should be subject to additional requirements than other crypto assets, and that these requirements should be strengthened if a stablecoin is deemed to be significant due to their size or interconnectedness.

By following this approach, the BoE seems to rule out a blanket prohibition of stablecoins and it is poised to integrate these crypto assets in the payment system under new rules. The Bank also offers indications about the requirements that companies will have to meet. For instance, stablecoins issued as tokenized bank deposits by banks, subject to the full banking regulatory regime, could meet the regulator´s expectations just by offering the same protections as currently exist for bank deposits. However, for non-banks that would like to issue systemic stablecoins, or that could reach that status, they would be subject to another regulatory regime that mitigates systemic risks.

As some of the most relevant stablecoins are likely to fall in this last category, the Bank is already working with the Treasury and the Financial Conduct Authority (FCA) to design an appropriate regulatory framework to meet these objectives. Yet, any regulation in this regard will still need time. According to the report, the BoE intends to consult on its proposed regulatory model for systemic stablecoins and systemic wallets in 2023.

Read more: Crypto Promotions in the UK Will Be Harder To Get Approved

The U.K., like other western countries, is adopting a permissive, yet cautious approach to crypto regulation. So far, the U.K. has only banned the sale and exchange of derivates and exchange traded notes that reference certain types of crypt assets to retail investors given its volatility and complexity. The FCA is also considering bringing crypto promotions under FCA’s rules, which are stringer than the current ones, but it is not planning to adopt any prohibition either on the promotions or the underlying activities.

The proposal to adopt a new regulatory framework for stablecoins will likely be developed in parallel to the U.K.’s plan for a central bank digital currency (CBDC). The Bank and the Treasury will launch a consultation in 2022 to assess whether the U.K. should issue a retail CBDC and the decision to issue or not a CBDC will likely have an impact on the scope of the regulation for stablecoins.

See also: Bank of England Takes the Slow Lane for CBDCs, and It is Not the Only One

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Traciwininger
Author: Traciwininger

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