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The Bank of England and the Financial Conduct Authority have launched proposals to introduce stablecoins, a type of digital token designed to track the price of hard currencies, into the real economy as a payment option for goods and services.
The proposal includes making central banks responsible for directly overseeing the entities behind stablecoins. It also requires that payment systems using digital tokens be fully backed by central bank deposits. Stablecoin issuers will also be required to demonstrate how they intend to manage redemptions, particularly during times of stress.
The proposal is the latest step in Britain’s bid to establish itself as a hub for digital assets, amid concerns that Brexit threatens London’s dominance as Europe’s leading financial centre.
Last week, the Treasury published its response to a consultation on the future of crypto regulation in the UK, under which stablecoins will be regulated under existing rules for traditional payment service providers. The company said its proposal was based on recent events “including the collapse of FTX.”
Sheldon Mills, the FCA’s executive director for consumer and competition, said: “Stablecoins have the potential to make payments faster and cheaper for everyone, which is why we are looking forward to seeing businesses embrace this innovation securely and cheaply. We want to make sure it’s available.”
Sarah Breeden, deputy governor for financial stability at the Bank of England, added that stablecoins could “power up digital retail payments” in the UK.
However, stablecoins often fail to track hard currencies. Last May, the infamous stablecoin project Terra was unpegged, sparking an unprecedented crypto market crisis. In March, Circle Inc.’s USDC token (the second-largest in circulation) fell to 88 cents after the company admitted $3.3 billion in exposure to a failed Silicon Valley bank.
None of the existing stablecoins currently meet the supervisory criteria under the BoE’s proposed regime, according to people familiar with the matter, as they are primarily used for crypto payments rather than retail payments. “However, this situation could change quickly if the business grows rapidly or if the stablecoin partners with an existing company that already has a large payment customer base,” the official added. Ta.
The proposal also explores the possibility of allowing overseas stablecoins to access the UK payment chain.
In the Treasury’s view, a ‘payment arranger’ will be an authorized entity under the UK’s existing Payment Services Regulations and will be subject to the FCA’s approval before being allowed to assess whether an overseas stablecoin can be used in the UK. Approval required.
The regulator said in a discussion paper that the Treasury Department’s proposal to adapt foreign stablecoins to the economy “may have disadvantages as well as advantages.”
Last month, the FCA announced new standards that will prohibit unlicensed companies from selling crypto products, which may include stablecoins, to UK customers.
