The Bank of England (BoE) and the Financial Conduct Authority (FCA) have initiated a regulatory regime for stablecoins, particularly those denominated in sterling, and other systematic payment systems. The move aims to maintain trust in money and payments while addressing concerns over money laundering and de-pegging. The regulatory changes broaden both the bank's and the FCA's purview to include operators of systemic payment systems and service providers approved by HM Treasury (HMT), along with entities transferring 'digital settlement assets' such as stablecoins.
Stablecoins are privately-issued digital assets designed to hold steady value against fiat currency. The BoE's and FCA's enhanced powers allow them to regulate “systemic payment systems” involving these digital tokens and associated service providers dealing with digital settlement assets. According to the BoE's report, there is substantial potential for UK citizens to use stablecoins in daily transactions.
The proposed regulations operate on the principle of “same risk, same regulatory outcome,” suggesting comparable risks between systemic payment systems using stablecoins and conventional ones. Unbacked crypto-assets are deemed unsuitable for extensive retail usage in the UK.
The BoE, along with the FCA, represented by figures such as Sarah Breeden and Sheldon Mills, is pushing for the integration of stablecoins into the UK payments system. This is part of a post-Brexit digital assets strategy aiming to fortify the UK's position as a leading digital assets hub. The two institutions plan to collaborate on regulating pound-backed stablecoins, with clearly delineated roles.
These digital tokens, pegged to hard currencies, are being considered as a valid option for retail transactions rather than just cryptocurrency payments. Proposals include strict regulation and oversight, with the BoE supervising entities behind stablecoins. To ensure stability, these tokens should be fully backed by central bank deposits, and issuers must maintain robust plans for managing redemptions.
The FCA, on the other hand, announced plans for strict stablecoin regulation, emphasizing high authorization standards. It is seeking industry feedback and issuing warnings about non-compliance penalties.
The proposals also consider the role of 'payment arrangers' in assessing foreign stablecoins' suitability for use in the UK. Stablecoins offer potential benefits such as faster, cheaper payments but also face challenges, including some failing to maintain their value peg to hard currencies. No current stablecoin meets the BoE's and FCA's proposed criteria, but this could change with rapid company growth or partnerships between stablecoins and established firms with large customer bases for payments.
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