The Bank of England (BoE) and Financial Conduct Authority (FCA) have revealed proposals to regulate stablecoins and integrate them into the wider UK financial market.
This follows the announcement of broader plans made by the UK Treasury last week to introduce the groundwork for clearer rules and regulations regarding the crypto sector within the country, seeking to start off by regulating stablecoins next year.
BoE will oversee the circulation and activity of “systemic stablecoins” to maintain financial stability, whilst the FCA will preside over activities regarding the wider UK crypto market something which the financial watchdog has already begun implementing.
A key focus for both UK parties in how stablecoins should be regulated largely relates to a payment-focused aspect, with the fiat-backed digital currencies gaining momentum over the past several months through various private companies, such as PayPal, issuing their own native stablecoin.
Whilst the BoE has addressed the risks associated with privately issued stablecoins such as PayPal’s PYUSD, it is believed that the central bank would allow these companies to issue their stablecoins as a means and form of payment under its “systemic” terms.
The BoE addressed the potential and risks of stablecoins in a statement outlining various requirements and regulations for the digital currency’s introduction pending in 2024.
The BoE statement outlined: “Similar to other systemic payment systems, those using stablecoins carry out the function of transferring a settlement asset in order to settle payments obligations.
“To the extent that the risks in doing so are similar to those of the transfer function performed by other systemic payment systems, we propose to rely on our existing regulatory and supervisory approach to those systems.
“This is in line with the Bank’s ‘same risk, same regulatory outcome’ approach to regulating systemic payment systems using stablecoins.”
Stablecoins for the best part of several years now have been hailed as a fitting bridge between cryptocurrency and fiat currency as the digital currency relies on the 1:1 backing of a traditional currency such as GBP.
Due to being pegged to another fiat currency, they reduce the volatility often associated with cryptocurrencies and offer vast potential in terms of near instant payment settlements as a new alternative payment method.
However, much like all cryptocurrencies, there are a plethora of risks involved with stablecoins, due to lack of transparency and the need for stringent regulation could spell a lack of innovation for the digital currency.
The BoE intends to peg the UK’s stablecoin offering with GBP and is considering limits on stablecoin holdings if the timeline maintains for its regulatory introduction next year.
Both the BoE and the FCA will consult with one another on the final terms and regulations on stablecoin issuance by the midpoint of next year, with possible issuance landing in 2025.
Payment Expert Analysis: This landmark move by the Bank of England represents a key step for stablecoin’s entry into the UK mainstream. The key test for stablecoins will come in the form of consumer engagement and whether adequate regulation can spur bolster mass adoption.