The Bank of England (BOE) will regulate “systemic stablecoins” that are in wide enough circulation to potentially disturb financial stability, while the Financial Conduct Authority (FCA) will oversee the wider crypto sector according to discussion papers published by the two regulators Monday.
The proposals followed broader plans for overseeing the crypto sector published by the U.K. government last week.
Proposals from Big Tech companies like Facebook, now Meta (META), and PayPal (PYPL) to issue stablecoins and last year's collapse of stablecoin empire Terraform Labs have propelled related regulation worldwide, with major jurisdictions such as the European Union and Japan recently finalizing regimes.
While the EU's Markets in Crypto Assets (MiCA) regulation seeks to limit potentially wide-use stablecoins such as the one proposed by Meta, a person familiar with the matter said the BOE's proposals would allow companies to issue payments-focused, fiat-backed stablecoins in the U.K. if approved to do so. No existing stablecoin, however, qualifies as "systemic" under the proposals.
The U.K., which has expressed a desire to become a global 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.
The discussion papers published Monday represent "an exploratory phase in developing the new regime," and after regulators receive feedback from stakeholders on these proposals, they will consult on the final rules, the BOE said. The FCA and the central bank aim to consult on final rules by mid-2024, and implement the stablecoin regimes by 2025, according to a document published alongside the discussion papers.
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. Among other things, the central bank is considering limits on individual stablecoin holdings.
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 that 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.
Meanwhile, the FCA said issuers will need to seek authorization to circulate fiat-backed stablecoins in or from the U.K. It wants stablecoins to be backed by “appropriate” assets to equal the value in circulation. It also wants issuers to make sure that the crypto 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.” The FCA is also of the view that regulated stablecoin issuers should not be permitted to pay income or interest to consumers.
“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.
UPDATE (Nov. 6, 09:50 UTC): Adds FCA paper in headline and text, and adds detail throughout the article.
UPDATE (Nov. 6, 11:36 UTC): Adds details throughout.
UPDATE (Nov. 6, 11:56 UTC): Adds timeline for regimes in the sixth paragraph.
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