Regulators in the U.K. have unveiled their proposals for governing the use of stablecoins.
The Bank of England (BOE) and the country’s Financial Conduct Authority (FCA) on Monday (Nov. 6) published regulations designed to harness the potential of stablecoins, a form of cryptocurrency backed by fiat currency.
“Stablecoins can enhance digital retail payments in the UK,” Sarah Breeden, the BOE’s deputy governor for financial stability, said in a news release. “With this comes the need to make sure there is robust and clear regulation in place.”
Breeden added that the regulators’ “proposals aim to support safe innovation so that firms can understand the risks they need to manage and ensure that the public can be confident in all forms of digital money and payments.”
According to the proposal, stablecoin issuers whose coins are used in “systemic payment systems” would be subject to regulatory standards that are the equivalent of the ones applied to commercial banks.
And along with these regulations, the central bank’s Prudential Regulation Authority (PRA) has issued a letter to the CEOs of England’s financial institutions highlighting the risks posed by digital money deposits.
“With the emergence of multiple forms of digital money and money-like instruments, there is a risk of confusion among customers, especially retail customers, if deposit-taking entities were to offer e-money or regulated stablecoins under the same branding as their deposits,” the letter reads.
“Retail holders of e-money or regulated stablecoins might mistakenly assume that they have exactly the same protections as retail depositors.”
The letter adds that this risks contagion, even for stablecoins used in systemic payment systems — which will be protected under the BOE’s proposed regulations.
“In particular, following any event that draws retail customers’ attention to different types of protections, or prompts them to lose confidence in e-money or regulated stablecoins, retail customers may lose confidence in deposits — especially if deposit-takers were to offer multiple forms of digital money or money-like instruments,” the PRA said.
The new regulations come one week after the British treasury announced its intent to begin regulating cryptocurrencies the same way as other financial services, along with plans to bring stablecoins under the purview of the BOE and FCA.
This “altogether will aim to minimize potential for customer harm and mitigate the conduct, prudential, and financial stability risks arising from those stablecoins, particularly when used for payments,” the government’s announcement said.