Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The Bank of England has eased its planned restrictions on stablecoins in response to criticism of its strict approach to the tokenised forms of money as it seeks to avoid the UK falling behind in digital asset markets.
The BoE said on Monday it was ditching its plan to impose ownership limits on UK stablecoins, replacing this with a £40bn issuance limit. It also lowered the proportion of assets backing stablecoins that must be held in zero-interest deposits at the central bank.
Crypto asset companies previously complained about both proposals, warning they would be more restrictive than planned US rules, make it less attractive to launch pound stablecoins and hold the UK back in the race to become a digital assets hub.
“This is a major milestone in delivering greater choice and innovation in UK payments. Innovation thrives on trust,” said Sarah Breeden, BoE deputy governor for financial stability. “Today we’ve set out the foundations of that trust for a new form of money — with prompt redemption, strong protections and central bank support.”
Monday’s changes were first flagged by Breeden in an FT interview last month when she said some of the BoE’s proposals might be “overly restrictive” and signalled its willingness to examine “different ways” of addressing risks from stablecoins.
The shift in policy was welcomed in the City of London. But some expressed concerns that the rules remained too restrictive on backing assets and on commercial banks’ ability to issue stablecoins.
“Further progress is needed to ensure the regime does not constrain sustainable business models, particularly through the backing-asset requirements,” said Mark Fairless, head of ClearBank, adding that it would be “near impossible” for commercial banks to issue stablecoins.
Commercial banks will only be allowed to issue stablecoins from a “non-deposit-taking insolvency-remote entity with distinct branding from the deposit-taker”, the BoE said last month.
Stablecoins are digital tokens pegged at a fixed rate of one-to-one to a fiat currency such as the dollar. US dollar stablecoins dominate the $315bn global market and there are few sterling-based tokens, which at present make up less than 0.5 per cent of the total.
A cornerstone of cryptocurrency trading, the sector has divided regulators, with some fearing it represents a threat to global financial stability while supporters see stablecoins as a promising innovation that can make cross-border payments cheaper and faster.
As the BoE drew up rules for any systemic stablecoins that are widely used in payments, it initially planned to restrict individuals to owning up to £20,000 per coin and businesses to owning up to £10mn, to avoid a major outflow of deposits from banks.
However, on Monday it said it would replace the proposed ownership limits with a “temporary issuance guardrail” limiting systemic stablecoins to issuing no more than £40bn. This would be “reviewed regularly and removed once risks to credit provision have been addressed”.
Katie Harries, head of policy in Europe at US cryptocurrency exchange Coinbase, said: “Two questions remain if the UK is to fully capitalise on the benefits stablecoins can bring: what ‘temporary’ means for the per-coin issuance cap (the UK is the only country capping issuance of stablecoins in its own currency), and whether stablecoins can be used for settlement in core wholesale markets, without which the UK’s tokenisation ambitions will not be delivered.”
The BoE also reduced the amount of assets it will require stablecoin providers to keep in non-interest-earning accounts at the central bank from 40 per cent to 30 per cent. “The change supports more viable business models while still allowing issuers to deal with outflows,” it said.
In the US, banks have lobbied to prevent stablecoins from being able to offer rewards to holders that could increase their appeal to savers and raise the risk of deposit flight. The BoE said it would ban interest payments on stablecoins but allow credit card-style rewards for transactions.
UK stablecoin issuers would have to keep their backing assets in a statutory trust and be able to reimburse holders within 24 hours, the BoE said. They will also need to keep enough capital and liquidity in a separate trust to cover the costs of winding themselves down.
The revised proposals will be open to feedback until September 22. The BoE will publish more detail alongside the Financial Conduct Authority “shortly” and aims to finalise its rules by the end of the year to allow regulated stablecoins to operate from next year.
