Bank of England Still ‘Disproportionately Cautious’ on Stablecoins

The central bank of the United Kingdom, the Bank of England (BOE), has published a proposed regulatory regime for stablecoins. The consultation document took into account the perspectives of the crypto industry, but some observers say it remains restrictive.

BOE released the document on Nov. 10 — about two years after announcing the initial discussion paper. The original offered a vision for crypto that many in the industry claimed would doom the UK digital asset space.

The BOE said it received comments and feedback from a wide range of 46 different stakeholders, including “banks, non-bank payment service providers, payment system operators, trade associations, academics and individuals”.

The central bank of the United Kingdom may have scrapped some more rigid requirements, but some in the industry believe that it is not enough. Tom Rhodes, legal director of UK-based stablecoin issuer Agant, said the bank remains “disproportionately cautious and restrictive”.

The Bank of England is still cautious about stablecoins

The new iteration features a number of improvements over the 2023 version, Rhodes told Cointelegraph.

“The latest proposals include some innovative features, such as direct BOE liquidity lines and the ability to repo reserves for liquidity purposes.”

He said that, in terms of the UK market, “these proposals can be explored and potentially expanded to create a more competitive support asset regime, without compromising stability”.

But despite the “welcome progress in the BOE’s sentiment toward stablecoins,” it has been “unusually vocal about the perceived risks of stablecoins,” Rhodes said.

One of the most controversial restrictions in the document was the limits of what the BOE called “systemic stablecoin sales”. In the document, this is defined as a stablecoin that is “widely used by individuals to make daily payments such as shopping and receiving wages.”

The central bank wants to see limits of 20,000 pounds for individuals and 10 million pounds for companies that accept as a form of payment. This is an increase from the initial proposal, but the idea of ​​limits on how much crypto you can hold does not sit well with some.

Crypto influencer Aleksandra Huk he wrote“Bank of England wants to cap stablecoin holdings at £20,000. Who gave them the right to say what to buy, where to keep our money and how much we can have? […] Honestly, this is the best announcement ever for privacy coins and for leaving the UK.”

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There are a few caveats to the suggested rule. Geoff Richards, community leader at the Ontology Network, noticed“The proposal only applies to sterling-denominated stablecoins used in UK payment systems that could become ‘systemic’. Not USDT, not USDC, not random DeFi tokens.”

Ian Taylor, board member of crypto industry advocacy group CryptoUK, told Cointelegraph that he understands the central bank’s more cautious approach, at least as it applies to stablecoin limits:

“The Bank of England has a mandate to protect against financial stability. And that financial stability is connected to the banking system. In that banks take deposits and issue loans against those deposits. […] it creates credit, this is an economic benefit for any economy we have.”

The BOE is rightly concerned that taking deposits from banks reduces their ability to lend, affecting financial stability. “So that’s why they want to take a baby step.”

Rhodes said the “vast majority” of UK stablecoins would not fall under the regime anyway, at least not as stated in the paper. He noted that Mastercard was only recognized as a systemically important payment system in 2021 and that non-systemic stablecoins will be regulated under the rules of the Financial Conduct Authority (FCA), “which is less restrictive”.

Still work to be done as the UK opens up to crypto

Access to central bank liquidity and deposit accounts at the BOE was a welcome update for stablecoin issuers. But representatives of the crypto industry believe that there is still room for improvement in the central bank’s plan.

As for stablecoin caps, “The systemic limits remain uncertain,” Rodi said. He said it would be useful to have a clarification from Her Majesty’s Treasury when an issuer has reached a sufficient scale to “pose a risk to the UK economy as a whole, before we recognize the issuer as systemic”.

Taylor also noted the difficulty of enforcing these stablecoin caps. If the government licenses an issuer, then they are “responsible for monitoring each customer or individual customer, whether wholesale, corporate or retail, as to how many stablecoins they have given.”

The problem is that many people get their stablecoins in the secondary markets or a “hell of different sources”. People can receive stablecoins as compensation at work or in an exchange or peer-to-peer transaction. “So, the current operational application of what I’m asking, and we haven’t seen any details about it.”

Overall, “clarity and speed” will make the UK stablecoin ecosystem more competitive, said Arvin Abraham, partner at Goodwin Procter. He told Cointelegraph that regulators should give issuers “a clear track and predictable timelines” to navigate the approval process.

Speed ​​is not the government’s strong suit, however.

The British government has been working on crypto regulations since 2017, when it first adopted Anti-Money Laundering and Know Your Customer requirements for crypto businesses such as exchanges. Now, eight years later, the central bank is still developing its policies based on industry feedback.

The slow pace of progress presents a problem. According to Taylor, “We’ve been consulting on a broader framework to regulate stablecoins for almost five years, and we still haven’t gotten an actual licensing framework in place, which is problematic for a number of reasons,” he said.

“It doesn’t help companies that want to launch stablecoins in the UK. They don’t have a clear roadmap of how to do this,” he said, “which in turn forces them to move offshore to jurisdictions where there are other regulatory frameworks that are already in place.”

This is for a number of reasons, Taylor explained, including consecutive changes in government, as well as a lack of “real champions in any of our key players, whether it’s the current government, whether it’s the Treasury, whether it’s the FCA”.

Progress on crypto regulations may be slow in the UK – slower than many in the industry would like – but for Abraham, “The Bank is pragmatic and fair. The primary message is that innovation is welcome, but if you want your token to function as money, you need quality controls of money”.

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