UK Aims to Foster Financial Stability with Stablecoin Regulations

• UK financial regulators’ proposals for systemic stablecoins pegged to the British pound
• Bank of England (BOE) identifies stablecoins linked to the pound as the highest risk for payments
• BOE to regulate systemic stablecoins and their issuers directly

UK financial regulators laid out proposals to oversee systemic stablecoins pegged to the British pound in discussion papers published on Monday.

The Bank of England (BOE) said stablecoins linked to the pound pose the greatest risk of widespread use for payments. As such, the BOE plans to regulate systemic stablecoins and their issuers directly.

Meanwhile, the Financial Conduct Authority (FCA) will govern the broader crypto sector. The UK government previously said legislation for fiat-backed stablecoins would arrive in early 2024.

According to the BOE, this marks an initial exploratory phase to develop the stablecoin regulatory regime. The BOE will seek industry feedback on the proposals before finalizing rules through an official consultation.

UK’s goal is to mitigate the risks of stablecoin

The goal is to mitigate the risks to the financial system posed by systemic stablecoins tied to the pound. The Prudential Regulation Authority (PRA) warned lenders of potential “contagion risks” and noted that protections differ for stablecoin users versus traditional deposits.

The PRA expects banks to take steps to manage threats of contagion. It said Bank of England-regulated stablecoins will bring fewer risks than other regulated coins overseen by the FCA.

Under the FCA’s proposals, all fiat-backed stablecoin issuers will need authorization to issue or trade stablecoins in the UK. The framework aims to foster financial stability.

Regulators globally are still determining how best to govern stablecoins amid serious policy questions. The high-profile collapse of the Terra ecosystem emphasized stablecoin risks.

The UK government has committed to making Britain a crypto hub. But with most stablecoin regulation still coming, these discussion papers indicate regulators favor a cautious approach to systemic stablecoins.

How the BOE and FCA incorporate feedback will be telling. While not banning stablecoins, regulators seem intent on preventing stablecoin runs that could destabilize the wider financial system.

Ensuring pound-pegged stablecoins are fully backed, transparent, and have redemption rights will likely be key priorities. But finding the right balance on crypto oversight continues to pose challenges.