The Bank of England’s proposed regulatory regime aims to maintain confidence in money and payments – this is core to preserving financial stability
There has been rapid innovation by the private sector in money and payments over the past few decades, giving households and businesses more choice over how they make and receive payments. This includes the emergence of ‘stablecoins’. They are a new form of privately issued digital assets that purport to maintain a stable value against a fiat currency. Stablecoins have the potential to be used by many people in the UK for everyday payments. It is important for policymakers to set out the regulatory requirements so innovators can plan ahead and so that innovation can be adopted safely.
We regulate operators of systemic payment systems, and service providers that provide essential services to these, after these have been recognised by HM Treasury (HMT). Recent legislative changes have expanded this remit to capture operators of systemic payment systems that transfer ‘digital settlement assets’ including stablecoins, and related service providers.
This discussion paper sets out our proposed regulatory framework for systemic payment systems using stablecoins and related service providers. It focuses on sterling-denominated stablecoins because it considers these are the most likely digital settlement assets to be used widely for payments. Part one outlines our role in ensuring the safety of money and payments and the scope of the regime, while Part two explains the proposed requirements of the regime.
It is published alongside a discussion paper from the Financial Conduct Authority (FCA) on their regulatory approach to stablecoin issuers and custodians, a letter from the Prudential Regulation Authority (PRA) to bank Chief Executive Officers on innovations in the use by banks of deposits, e-money and stablecoins, and a roadmap paper, which sets out how the various regimes interact together. With these joint publications, regulators aim to provide clarity as to which regulatory regime each form of money and money-like instrument falls under, with regulatory boundaries between each regime clearly established.
The discussion paper represents an exploratory phase in developing the new regime. After receiving and considering feedback from the industry on these initial proposals, the Bank will consult on its final proposed regime. The regime could be adapted over time as the nascent industry evolves.
Part one: the Bank of England’s role in ensuring the safety of money and payments, and the scope of the regime
Stablecoins are an example of recent innovation in payments. They are a new form of privately issued digital asset that purport to maintain a stable value against a fiat currency and may offer advantages in terms of cost, convenience and functionality. Stablecoins have the potential to be used by many people in the UK for everyday payments.
Regulation lays the groundwork for safe and sustainable innovation in money and payments. It is important for policymakers to set out the regulatory requirements so innovators can plan ahead and so that innovation can be adopted safely.
End to end regulation
Recent legislative changes brought stablecoins into regulators’ remits. These changes provided us with new powers to regulate systemic payment systems using ‘digital settlement assets’, including stablecoins, and related service providers, once these have been recognised by HMT. The FCA’s remit was also expanded to include stablecoin issuers and custodians.
Our regime focuses on sterling-denominated stablecoins because it considers these are the most likely digital settlement assets to be used widely for payments. This regime is intended for business models that are focused on payments-related activities and innovation within payments. It also focuses on retail uses, and proposed limits, if used, would constrain wholesale use of stablecoins at systemic scale. We consider that unbacked cryptoassets, or any other unbacked digital settlement assets, would not be suitable for widespread use in retail payments in the UK.
Further details on the Bank’s proposed regulatory framework are set out in Part one of the discussion paper.
The Bank’s remit for systemic payment systems using stablecoins
What type of stablecoin is the regime intended for?
Part two: proposed requirements
Same risk, same regulatory outcome
The proposed regime is guided by international standards (ie the Principles for Financial Market Infrastructures (PFMIs)) and the Financial Policy Committee’s expectations for stablecoins as money-like instruments. It follows the principle of ‘same risk, same regulatory outcome’. To the extent that systemic payment systems using stablecoins pose similar risks as other systemic payment systems, they should be subject to equivalent regulatory standards. And, as a new form of privately issued money, issuers of stablecoins used in systemic payment systems should meet standards that are at least equivalent to those that apply to commercial banks.
New regulatory requirements
Stablecoins present risks both in terms of their innovative use as a form of money or money-like instrument, and their use as a means of payment in systemic payment systems. Our proposed regime aims to address both these risks.
The regime aims to be flexible and could accommodate different business models in which various functions are performed by different legal entities. These functions include the payment system/transfer function, the issuance of the stablecoin as the settlement asset, and the customer interface/storage of stablecoins. However, the transfer function or payment system would remain the Bank of England’s ‘regulatory hook’.
We will require that there is an entity across the payment chain that can be identified as the payment system operator. This entity would need to be able to overview and assess all the risks arising from the different parts of the payment chain and ensure there are appropriate controls.
We propose that issuers would be required to fully back stablecoins with deposits at the Bank of England. No interest would be paid on these deposits. Combined with the other protections proposed in this discussion paper, this would aim to ensure that the stablecoins maintain their value and can be used for payments with full confidence.
Wallet providers, as the entities safeguarding coinholders’ means of control over their stablecoins, would need to ensure that coinholders’ legal rights and ability to redeem the stablecoins at par in fiat are protected at all times.
We recognise the benefits that new forms of ledgers can bring for payments. However, some existing stablecoin payment chains using public permissionless ledgers do not have centralised governance arrangements. In order to be used at systemic scale, any such payment system would have to assure us that a legal entity or natural person could be held accountable and responsible for end-to-end risk management in the payment system and compliance with regulation.
Further details on the Bank’s proposed requirements are set out in Part two of the discussion paper.