BoE, FCA to regulate stablecoins in the UK

The UK is making strides to integrate stablecoins into its economy, eyeing them as a potential alternative for day-to-day transactions.

Under new proposals, the Bank of England (BoE) seeks to extend its regulatory arm directly over stablecoins deemed systematic enough to shake the financial sector. At the same time, the Financial Conduct Authority (FCA) will keep its watch over the broader crypto landscape.

BoE’s focus sharpens on stablecoins tied to the pound, seeing them as probable candidates for widespread payment use. To mitigate risks, it’s considering a cap on how much of these stablecoins any one individual can hold.

The recent FCA proposals are set to bring stablecoin issuers under the same umbrella as traditional payment services, requiring them to back their tokens with real assets and ensure easy conversion to fiat. While issuers can enjoy the returns from the assets backing the stablecoins, they’re barred from sharing this income with users, marking a clear line between stablecoin holdings and bank deposits.

“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.

This regulatory push follows the Treasury’s review of the crypto sector and takes cues from the fallout of major players like FTX. It’s a move that underlines the UK’s ambition to become a sanctuary for digital assets, especially as Brexit casts shadows over London’s financial hub status.

The rules would also pave the way for international stablecoins to enter the UK market, albeit with a thorough check under the country’s payment services rules and FCA’s green light.

“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.

These proposals arrive amid heightened global attention on stablecoin regulation, spurred by high-profile projects from companies like Meta and PayPal, and dramatic market events such as the Terraform Labs collapse and the USDC devaluation.

The FCA’s newly minted standards, which prevent unlicensed firms from promoting crypto products in the UK, signal a firm stance on the sector’s governance. As the UK charts its course in the world of digital finance, stablecoins sit at the forefront of a potential payment revolution, albeit with a cautious and calculated approach.