The Bank of England (BoE) released a report Thursday, March 24 suggesting that a new legal framework to regulate crypto assets is needed, but specifically the report focuses on stablecoins and the need to put them under the mandate. form the bank. control potential systemic risks.
In the first part of the report, the BoE describes the role of crypto-assets and decentralized finance (DeFi) in the financial system. According to the Bank, these assets are still small enough to disrupt financial markets, but their growth suggests that legal frameworks should be in place to mitigate potential systemic risks. However, there is no indication of the type of regulation to be adopted. The BoE’s message sounds more like a warning than an action plan to craft specific regulations, at least for most crypto assets and DeFi products.
However, the story may be different for stablecoins. The BoE seems to have a clearer idea of the risks for systemic and non-systemic stablecoins and how regulation should affect banks and non-banks if they decide to offer stablecoins.
“This creation of money-like instruments for transactional purposes poses potential risks that go beyond those typically associated with existing payment systems. Care must therefore be taken that in addition to the risks of the payment system itself, the risks of this aspect of money creation are also managed,” the BoE said in the report.
The BoE is using the European Union Regulation on Crypto Asset Markets and the US President’s Task Force to suggest that stablecoins should be subject to additional requirements compared to other crypto assets, and that these requirements should be enhanced if a stable coin is deemed important due to their size or interdependence.
By following this approach, the BoE seems to rule out a general ban on stablecoins and it is about to integrate these crypto-assets into the payment system under new rules. The Bank also gives indications on the requirements that companies will have to meet. For example, stablecoins issued as token bank deposits by banks, subject to the full banking regulatory regime, could meet the expectations of the regulator simply by providing the same protections that currently exist for bank deposits. However, for non-banks that would like to issue systemic stablecoins, or could achieve that status, they would be subject to another regulatory regime that mitigates systemic risk.
As some of the most relevant stablecoins are likely to fall into the latter category, the Bank is already working with the Treasury and the Financial Conduct Authority (FCA) to design an appropriate regulatory framework to achieve these goals. Yet any regulation in this regard will still take time. According to the report, the BoE intends to consult on its proposed regulatory model for systemic stablecoins and systemic wallets in 2023.
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The UK, like other Western countries, takes a permissive yet cautious approach to crypto regulation. So far, the UK has only banned the sale and trading of derivatives and exchange-traded notes that reference certain types of crypto assets to retail investors given its volatility and complexity. The FCA is also considering subjecting crypto promotions to FCA rules, which are stricter than the current rules, but it does not plan to adopt a ban on either the promotions or the underlying activities.
The proposal to adopt a new regulatory framework for stablecoins will likely be developed alongside Britain’s central bank digital currency (CBDC) project. The Bank and Treasury will launch a consultation in 2022 to assess whether the UK should issue a retail CBDC and the decision whether or not to issue a CBDC will likely impact the scope of regulation for stablecoins.
See also: The Bank of England is taking the slow lane for CBDCs, and it’s not the only one