The Bank of Engalnd has released an updated policy on how it will regulate stablecoins.
The published consultation paper goes over several key ideas and aspects that will likely form the basis of a regulatory framework in the coming months.
Most importantly, it is the latest official update on the way leadership is considering managing stablecoins, since the Bank of England’s last discussion paper back in Q4 2023. Here are the biggest takeaways:
Both the Bank of England and the FCA will oversee stablecoin regulatory efforts, depending on the type of stablecoin category.
The paper produced a table that categorises different use-cases and their respective regulatory regimes, which is still somewhat similar to what was proposed in the 2023 paper. The main categories are classified as ‘Systemic’, ‘Non-Systemic’, ‘As A Settlement Asset’ and ‘Other’.
Overall, the timeline for final implementation will be in Q3/4 of 2026 as the feedback to this will only come by in February, giving the participating members around a year to get push these reforms through.
The Financial Services and Markets Act (FSMA) 2023 expanded the Bank’s regulatory remit to cover digital settlement assets (DSA), including systemic stablecoins. Systemic stablecoins – those that are widely used in payments and therefore may pose risks to UK financial stability – will be regulated by the Bank and the Financial Conduct Authority (FCA), once recognised by HM Treasury (HMT).
One of the most important areas for stablecoin issuers is the reserve management.
Previously, the Bank has suggested that the entirety of the stablecoin backing shall be in central bank deposits, however, given the negative feedback received from industry, the Bank has pivoted to a more issuer-friendly model where this is reduced to 40% with the rest 60% in short-term UK government securities.
The Bank can also lend to issuers to help with liquidity, as there may be a shortage of supply of such securities if reserves grow fast.
Next the Bank proposes that stablecoin balances remain capped for the foreseeable future, but doesn’t rule out reducing this in time and removing restrictions entirely as adoption grows in the country.
This is currently set at £20K per person and £10M per business entity per GBP stablecoin approved as ‘Systemic’.
Specifically, these sizes were selected because on the retail side, it helps to account for the large majority of would be coinholders ‘current account’ balances per their study and business limits can be more flexibly reviewed, as well as on the risk side, help to control a potential greater outflow of Bank credit and deposits.
Our internal analysis, guided in part by this paper, identified a range of £10,000 to £20,000 for holding limits, which would facilitate key usability criteria, with reference to being able to use the systemic stablecoin in a similar way to a current account.
We also considered the size of the proposed holding limit for businesses (£10 million) in the context of usability. Our judgement was that such limits should support a wide range of potential business-to-business use cases, similar to those seen today in commercial bank money.
However, we did recognise that such limits may be too low for some business user. For example, if large numbers of individuals in the UK choose to pay for their shopping using stablecoins in the future, supermarkets could build up balances larger than £10 million. We therefore propose to put in place an exemptions regime – which could be implemented through issuers – to allow limits to be adjusted in such cases.
Holding limits would cap potential outflows of bank deposits to systemic stablecoins in aggregate and so limit the potential impact on credit availability. Our internal analysis indicates that the proposed holding limits could mitigate the financial stability risks identified above, as the UK economy transitions to widespread adoption of systemic stablecoins.
The rest of the report highlight other facets in detail on capital requirements, insolvency measures, redemption processes, as well as weaknesses in some of the proposals (such as frictions between regulatory regimes of the Bank, DSS and FCA).
Additionally, there are fresh considerations towards the end on broader topics such as how to better integrate the provision of stablecoins within existing UK payment networks, how to approach wholesale requirements for stablecoin settlement across financial institutions, along with a new list of questions for industry participants to answer.
