Bank of England Explores Stablecoin Regulation

The UK government is moving to place stablecoins at the center of a new Bank of England mandate designed to encourage innovation in digital payments. HM Treasury announced on Thursday that the government plans to give the Bank of England a secondary objective focused on supporting innovation across payment systems and emerging forms of digital money.

The mandate would cover payment infrastructure using digital settlement assets such as stablecoins, while financial stability would remain the central bank’s primary responsibility. The proposal comes as the UK increases its focus on stablecoins through regulatory reforms, payment trials and closer cooperation with the United States.

Bank of England could take on new innovation objective

The proposed responsibility would build on an approach already used in the regulation of central counterparties and central securities depositories, which play key roles in clearing, holding and settling financial assets. Under the new framework, the Bank of England would be required to report to Parliament each year on the progress it has made toward its payments innovation objective.

“Developments in digital payments technology, including tokenisation and DLT [distributed ledger technology], have the potential to transform financial markets across the globe,” City Minister Lucy Rigby said. The government plans to implement the change through amendments to the Financial Services and Markets Bill, which is scheduled for further debate in the House of Lords on Sept. 7 and 9.

Stablecoin rules remain a key industry concern

The impact of the new objective may depend on how the Bank of England uses its annual reporting obligation, according to Maksym Sakharov, co-founder and CEO of onchain banking infrastructure provider WeFi. “The objective is secondary to financial stability, so it overrides nothing, but the bank will have to publish an annual account of its innovation efforts in payments and digital money,” Sakharov said.

He suggested that this reporting requirement could increase public scrutiny of the stablecoin rules finalized by the central bank in June. Sakharov highlighted a requirement for systemic stablecoin issuers to hold at least 30% of their reserve assets in non-interest-bearing deposits at the Bank of England. “The reserve split is the first thing to fix,” he said, arguing that the rule could play a major role in determining whether stablecoin businesses are commercially viable.

UK expands stablecoin and digital payment initiatives

The proposal follows several recent UK initiatives involving stablecoins and digital payments. In August, participants in the Bank of England’s Digital Pound Lab began testing whether a stablecoin and a simulated digital pound could operate together within a cross-border trade payment process. The experiment does not involve real customers or actual funds.

The UK and US also published a joint statement on stablecoins in mid-July, saying they “intend to enable the use of stablecoins in cross-border finance” while calling for greater alignment between their regulatory frameworks. The Bank of England has also abandoned earlier plans to cap individual stablecoin holdings at 20,000 British pounds and business holdings at 10 million pounds. Those limits were replaced with a temporary 40 billion pound ($52.9 billion) issuance cap for each systemic stablecoin.

Sources:

https://www.gov.uk/government/news/ministers-to-boost-innovation-in-payments-with-new-objective-for-bank-of-england

https://cointelegraph.com/news/uk-boe-innovation-mandate-stablecoins