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Introduction
The Bank of England (BOE) and the Financial Conduct Authority (FCA) have revealed plans to regulate “systemic stablecoins” that could potentially disrupt financial stability. These proposals follow the UK government’s broader plans for overseeing the crypto sector.
Major tech players like Meta (formerly Facebook) and PayPal have expressed interest in issuing stablecoins, and the collapse of Terraform Labs’ stablecoin empire last year has driven global regulatory efforts. Notably, the European Union and Japan have recently finalised their regulatory frameworks.
While the EU’s MiCA regulation aims to restrict the use of stablecoins like Meta’s proposal, the BOE’s plans could permit companies to issue payment-focused, fiat-backed stablecoins in the UK, subject to approval. None of the existing stablecoins meet the “systemic” criteria outlined in the proposals.
The UK, aspiring to become a global crypto hub, incorporated stablecoins into its payment regulation in June, with legislation for fiat-backed stablecoins expected in the coming year.
The discussion papers released on Monday mark an early stage in shaping the new regulatory framework. After gathering feedback from stakeholders, regulators will proceed to consult on final rules. This consultation is scheduled to take place by the second half of 2024, as stated by a BOE official during a Monday press briefing.
Protections for stablecoin issuers
The Bank of England (BOE) is focusing its regulatory plans on stablecoins linked to the British pound, anticipating their widespread use in payments. The BOE is considering potential restrictions on individual stablecoin holdings to manage risks.
In addition to the BOE’s paper, the Prudential Regulation Authority (PRA) issued a letter to deposit-takers. The PRA emphasised the need for lenders in the UK to address contagion risks, noting that traditional deposit takers have different protections compared to stablecoin users.
The letter highlighted that contagion risks are expected to be lower for stablecoins utilized in systemic payment systems under the BOE’s regulation, compared to e-money or other regulated stablecoins overseen by the FCA’s regime.
FCA plans
The FCA has outlined its requirements for issuers looking to circulate fiat-backed stablecoins within or from the UK. They must seek authorisation and ensure that stablecoins are backed by appropriate assets matching their circulation value. Issuers must also guarantee the easy conversion of stablecoins to fiat, irrespective of technical or liquidity challenges.
Additionally, the FCA proposes that regulated stablecoin issuers retain revenues generated from interest and returns on backing assets. This step is aimed at distinguishing stablecoins from deposits. However, the FCA suggests that regulated issuers should refrain from offering income or interest to consumers, which may be seen as unfair, especially if interest rates rise significantly while backing assets are protected as client assets.
Global impetus and the UK’s position
The UK’s drive to regulate stablecoins falls in line with worldwide regulatory efforts, influenced by recent stablecoin crises and Big Tech’s involvement in the crypto sector. With the European Union and Japan establishing regulatory models, the UK is part of a global effort to strike a balance between innovation, investor protection, and market integrity.
The Bank of England and the FCA are in the early stages of gathering feedback on their initial proposals, reflecting the UK’s preparedness to adapt to the ever-changing digital currency landscape as the conversation progresses.
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In light of the UK’s commitment to regulating stablecoins and ensuring a secure crypto landscape, it’s evident that the crypto industry is entering a new era of scrutiny and oversight. With the Bank of England and the Financial Conduct Authority (FCA) leading the charge, the UK aims to strike the right balance between innovation, investor protection, and market integrity.
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