The Bank of England has declared that stablecoins — cryptocurrencies pegged to other assets — must be subject to tough scrutiny in the latest sign of regulators preparing to crackdown on digital tokens.
The BoE said on Monday it had not yet decided on its regulatory approach to stablecoins, but that it expected issuers of the assets to have sufficient reserves backing outstanding coins and to offer owners one-to-one redemptions for traditional cash.
“The prospect of stablecoins as a means of payment . . . [has] generated a host of issues,” said BoE governor Andrew Bailey. “It is essential that we ask the difficult and pertinent questions when it comes to the future of these new forms of digital money.”
In a paper also released on Monday on new forms of digital money, the BoE said that companies offering stablecoins should not enjoy “regulatory arbitrage” through looser rules than traditional banks.
Stablecoins offer a popular and convenient way to transfer funds between everyday currencies such as sterling and cryptocurrencies such as bitcoin. Unlike bitcoin, which was trading at $57,000 a month ago but has dropped to around $36,000, stablecoins aim to offer less volatility.
While policymakers in Europe and the US are weighing up potential plans for closer oversight of stablecoins, the BoE’s paper marks one of the most strident and specific calls for regulation to date.
Cryptocurrencies faced a bruising May due to growing regulatory threats. A warning from the People’s Bank of China about accepting cryptocurrencies or offering related services sent bitcoin prices down as much as 30 per cent. The US is also considering action, with Michael Hsu, acting comptroller of the currency, telling the FT he hoped officials could create a “regulatory perimeter” around the coins.
Tether, the largest stablecoin, has more than 60bn coins in circulation, up from about 20m at the start of the year. USD Coin, its largest rival, has increased its supply from about 4bn to more than 23bn in the same period.
But regulators are increasingly concerned about the limited consumer protection they offer, their potential role as a less traceable form of money, the suitability of their reserves, and the ambiguous regulatory space in which they operate.
“For stablecoins to be used alongside commercial bank money, the Bank must be satisfied that they are safe . . . and they must not rely on making promises that they cannot guarantee to keep over time,” the BoE said. It has called for consultation on the topic, with feedback expected by early September.
Cryptocurrency advocates continue to push for digital assets to be adopted by mainstream institutions. On Sunday, El Salvador’s president Nayib Bukele announced that he would propose legislation to make bitcoin legal tender in the country.
The BoE said it was yet to make a decision on whether to introduce a central bank digital currency (CBDC) — an official digital payment system separate from cryptocurrencies. Central banks in countries including China and the US are exploring similar options.
In April, the Treasury and the BoE announced a joint task force to study a CBDC to improve the payments system. Chancellor Rishi Sunak said the UK “need[ed] to go further” to keep at the head of financial innovation. The BoE noted that a CBDC could play an important role in expanding retail access to central bank money, as well as potentially boosting monetary policy controls.
The bank outlined key principles for future exploration of the issue including financial inclusion, privacy protection and a lack of harm to the BoE’s ability to foster monetary and financial stability. It said the potential value of private sector alternatives should also be considered.
Without proper regulation, a CBDC could undermine faith in the BoE and sterling, said Sarah Coles, personal finance analyst at Hargreaves Lansdown. “The digital currency . . . would need to be effectively regulated as fully as banks, so they could be completely relied on.”
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2021-06-07 17:11:32Z
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