UK sets out proposals to bring stablecoins into real economy

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The Bank of England and Financial Conduct Authority are setting out proposals that will bring 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 proposals include making the BoE responsible for directly supervising the entity behind the stablecoin. They also call for the payment systems using digital tokens to 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 proposals are the latest step in the UK’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 and under its plans stablecoins will be regulated under existing rules for traditional payment service providers. It said its proposals were informed by recent events “including the collapse of FTX”. 

“Stablecoins have the potential to make payments faster and cheaper for all, and that’s why we want to offer firms the ability to utilise this innovation safely and securely,” said Sheldon Mills executive director of Consumers and Competition at the FCA. 

Sarah Breeden, deputy governor for Financial Stability at the Bank of England, added that stablecoins can “enhance digital retail payments” in the UK. 

However, stablecoins have frequently failed to track hard currencies. In May last year, infamous stablecoin project Terra depegged, sparking an unprecedented crypto market crisis. In March, Circle’s USDC token — the second largest in circulation — fell as low as 88 cents after the company admitted a $3.3bn exposure to now-collapsed Silicon Valley Bank.

No existing stablecoin would currently meet the criteria for supervision under the BoE’s proposed regime as they are predominantly used for crypto payments rather than retail payments, according to a person familiar with the matter. “But this could change quickly, if businesses grow rapidly or if stablecoins link up with an existing firm that already has a large customer base for payments,” the person added. 

The proposals also explore the prospect of allowing overseas stablecoins access to the UK payment chain.

Under the Treasury’s view, “payment arrangers” would be entities authorised under the UK’s existing payment services regulations, and would require FCA approval before being permitted to assess the appropriateness of an overseas stablecoin for use in the UK.

In its discussion paper, the regulator said the Treasury’s proposal to accommodate overseas stablecoins in the economy “could have drawbacks as well as benefits”.

Last month the FCA unveiled new standards that ban unauthorised firms from marketing crypto products, potentially including stablecoins, to UK customers.