Stablecoin issuers like Tether are about to face a tighter regulatory leash as the Bank of England (BOE) unveiled its plans to regulate “systemic stablecoins.” Simultaneously, the Financial Conduct Authority (FCA) will be responsible for overseeing the broader cryptocurrency sector, as outlined in discussion papers jointly published by the two regulatory bodies on Monday.
These proposals follow the recent announcement of the UK government’s comprehensive plan for regulating the cryptocurrency industry, with legislation for fiat-backed stablecoins being introduced early next year.
Proposals originating from major technology players like Meta and PayPal to introduce stablecoins, coupled with the notable collapse of the stablecoin empire Terraform Labs last year, have spurred regulatory efforts worldwide. Prominent jurisdictions such as the European Union and Japan have already finalized their regulatory frameworks.
While the European Union’s Markets in Crypto Assets (MiCA) regulation aims to restrict potentially widespread stablecoins, such as the one proposed by Meta, sources familiar with the matter suggest that the BOE’s proposals would allow companies to issue payments-focused, fiat-backed stablecoins in the UK, provided they meet certain approval criteria. It’s important to note that none of the existing stablecoins meet the threshold of being deemed “systemic” under these new proposals.
The United Kingdom, keen on establishing itself as a global crypto hub, had earlier brought stablecoins under the purview of the country’s payments regulation in June. Legislation to govern fiat-backed stablecoins is anticipated to be introduced early next year.
The discussion papers released on Monday mark the preliminary stage in the development of this new regulatory framework. Following feedback from various stakeholders on these proposals, both the BOE and the FCA intend to consult on the final rules. Their goal is to have the stablecoin regulations in place by 2025, with consultations expected to conclude by mid-2024, as outlined in a document accompanying the discussion papers.
The BOE’s emphasis is primarily on stablecoins pegged to the value of the British pound, as these are expected to have broad utility in payment systems, according to a press statement from the central bank. Among the considerations being weighed by the BOE are limits on individual stablecoin holdings.
The publication of the BOE’s paper on Monday coincided with a letter from the UK’s Prudential Regulations Authority (PRA) addressed to deposit-takers. The PRA anticipates that lenders in the UK will need to mitigate the risks of “contagion,” distinguishing the protections available to traditional deposit-takers from those provided to stablecoin users. The letter clarifies that “contagion risks will be lower for stablecoins used in systemic payment systems regulated by the Bank than for e-money or other regulated stablecoins captured by the FCA’s regime.”
In the meantime, the FCA has stipulated that issuers must obtain authorization to circulate fiat-backed stablecoins within or from the UK. These stablecoins should be fully backed by “appropriate” assets, equivalent to the value in circulation. Additionally, issuers are required to ensure that their cryptocurrency can be readily converted into fiat currencies, irrespective of technical or liquidity challenges.
The regulatory body has also proposed that regulated stablecoin issuers be permitted to retain revenues generated from “interest and return from the backing assets.” This measure is intended to establish a clear distinction between stablecoins and deposits. The FCA maintains the view that regulated stablecoin issuers should not be allowed to provide income or interest to consumers, which could be seen as unfair should interest rates remain high or increase significantly.
“We are conscious that this may be perceived as unfair to consumers, in the event that interest rates continue to remain high and/or go up significantly (given that the regulated stablecoin backing assets are expected to be protected as client assets),” the paper from the FCA stated.
This comes after Republican lawmakers have called on the U.S. Department of Justice to thoroughly investigate Tether to determine if they are potentially providing support to terrorism funding in the wake of recent attacks in Israel.
Tether faced penalties from the Commodity Futures Trading Commission in 2021 for issues related to its stablecoin USDT. Notably, Tether recently froze 32 addresses controlled by Hamas and Russian-linked entities in Israel and Ukraine, as reported by the Financial Times.
READ: US Lawmakers Want Criminal Charges For Binance, Investigate Tether On Alleged Terrorism Funding
Earlier, the US Federal Reserve issued a comprehensive policy statement clarifying its stance on state member banks engaging in certain activities involving digital currencies, particularly dollar tokens. The policy statement addresses section 9(13) of the Federal Reserve Act and its implications for state member banks and their subsidiaries. In essence, the policy statement sets forth a presumption that the Federal Reserve will exercise its discretion to limit state member banks and their subsidiaries to engaging as principal in activities that are permissible for national banks.
Information for this story was found via Coindesk and the sources mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
