The Bank of England (BoE) published a regulatory proposal on November 6, 2023, requiring systemically important stablecoin firms operating in the UK to fully back their issuance with non-interest bearing central bank deposits. This proposal is part of the BoE’s effort to ensure that stablecoins are used with confidence and maintain their value at all times.
What are Stablecoins?
Stablecoins are a type of cryptocurrency that is pegged to a fiat currency, such as the US dollar or the British pound. This means that their value is designed to remain stable relative to the fiat currency they are pegged to. Stablecoins are often used to make payments and to transfer value between different exchanges.
Why is the BoE Proposing this Regulation?
The BoE is concerned about the potential risks posed by stablecoins, particularly systemic stablecoins. Systemic stablecoins are those that are widely used for retail payments and that could pose a risk to financial stability if they were to fail.
The BoE’s proposal is designed to address the following risks:
- Redemption risk: The risk that stablecoin issuers may not be able to redeem their stablecoins for fiat currency at par.
- Market risk: The risk that the value of stablecoin backing assets could fall, causing the stablecoin to lose its peg to the fiat currency.
- Operational risk: The risk of system failures or fraud at stablecoin issuers.
What are the Key Requirements of the BoE’s Proposal?
The BoE’s proposal sets out a number of key requirements for systemic stablecoin issuers, including:
- 100% central bank reserves backing: Stablecoins must be fully backed by non-interest bearing central bank deposits. This will help to ensure that stablecoin issuers are able to redeem their stablecoins for fiat currency at par at all times.
- Capital requirements: Stablecoin issuers must hold sufficient capital to cover any potential losses.
- Custodial management requirements: Stablecoin issuers must have robust custodial management arrangements in place to protect their reserves.
Benefits of the BoE’s Proposal
The BoE’s proposal is designed to provide the following benefits:
- Protect consumers: The BoE’s proposal will help to protect consumers from the risks associated with stablecoins, such as redemption risk and market risk.
- Promote financial stability: The BoE’s proposal will help to promote financial stability by reducing the risks posed by systemic stablecoins.
- Support innovation: The BoE’s proposal is designed to support innovation in the stablecoin sector by providing a clear regulatory framework for systemic stablecoins.
The BoE’s proposal is a significant step towards regulating stablecoins in the UK. The proposal is designed to protect consumers, promote financial stability, and support innovation in the stablecoin sector.