Bank of England Publishes Plans to Regulate Wide-Use Stablecoins

U.K. financial watchdogs shared plans to regulate stablecoins in discussion papers published Monday.

Proposals from the Bank of England (BOE) and the Financial Conduct Authority (FCA) followed broader plans for overseeing the crypto sector published by the U.K. government last week.

The discussion papers represent “an exploratory phase in developing the new regime,” and after regulators receive feedback from stakeholders on these proposals, they will go on to consult on its final rules, the BOE said.

The central bank also said it will be regulating “systemic stablecoins” that are in wide enough circulation to potentially disturb financial stability, while the FCA will oversee the wider crypto sector.

Proposals from Big Tech companies like Facebook (now Meta) and PayPal to issue stablecoins and the collapse of stablecoin empire Terra last year have propelled related regulation worldwide with the European Union and Japan recently finalizing regimes.

The U.K., which wants to become a crypto hub, successfully brought stablecoins into the scope of the country’s payments regulation in June. Legislation for fiat-backed stablecoins is expected early next year.

Protections for stablecoin issuers

The BOE’s plans focus on stablecoins pegged to the value of the British pound because the central bank considers these to be likely to be used widely for payments, the bank said in a press statement.

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

The PRA expects lenders in the country to mitigate risks “of contagion,” it said in the letter, which clarified 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.

FCA plans

Meanwhile, the FCA clarified in its paper that stablecoin issuers will need to seek authorization to circulate fiat-backed stablecoins in or from the U.K. It wants stablecoins in circulation to be backed by “appropriate” assets that can be easily redeemed for fiat currencies regardless of technical or liquidity issues.

The watchdog also proposed that regulated stablecoin issuers should be allowed to retain revenues derived from “interest and return from the backing assets,” which will help set a “clear distinction between stablecoins and deposits.”

“However, we are conscious that this may be perceived as unfair to consumers, in the event that interest rates continue to remain high and/or go up significantly (given that the regulated stablecoin backing assets are expected to be protected as client assets),” the paper said.

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