What the Bank of England’s Stablecoins regime might look like

Britain’s central bank wants to protect citizens from the collapse of major stablecoin issuers by updating an existing regulatory regime – a move that is imminent.

The BoE, like other regulators, is concerned that stablecoins could become more intertwined with the financial system over time – as more banks and financial companies adopt crypto – and could pose a risk to financial stability, although many of them acknowledge that it is not is a threat at the moment. So it plans to set up a regime to oversee stablecoins that could have an impact on the financial system, and will release its consultation on what that might look like in the coming weeks, before the rules are finalized and enacted .

BoE’s stablecoin regime is coming.

“With millions of consumers now owning some form of crypto, ensuring high standards of consumer protection must be a top priority for government, as well as mitigating potential market integrity and financial stability risks,” Lisa Cameron, a Member of Parliament and Chair of Crypto and Digital Asset All Parliamentary Group, said in a statement.

So what might the UK’s stablecoin regime look like?

The BoE wants to amend the Financial Market Infrastructure Special Administration Regime (FMI SAR), which gives the bank broad oversight of major UK-based payment systems, to also cover major digital settlements, including stablecoins, it said in its consultation. DSAs are digital assets used for payments. If the recently introduced Financial Services and Markets Bill comes into effect, the BoE will have the power to extend the existing FMI SAR regime to cover certain cryptos.

The FMI SAR regime is essentially an insolvency regime, said Josh Sadler, director of regulation at blockchain payments system Fnality International. Sadler previously worked in the BoE. In the UK, insolvency or administration regimes are similar to bankruptcy regimes elsewhere. One goal of the regime will be to help certain critical crypto businesses continue to run so that they do not have an impact on financial stability.

“The failure of a systemic DSA firm could have a wide range of financial stability as well as consumer protection effects” including disruptions to services critical to the economy and to individuals’ access to their own funds, the Treasury’s consultation on the FMI SAR said.

The BoE is exploring adding a new target that would ensure funds are returned to investors should a major stablecoin issuer collapse.

“I like… the additional objective of securing returns or transfer of funds because it not only gives increased confidence to consumers by directly reducing their risk, it will also act as a catalyst to increase the use of crypto as a means of payment, ” said Asim Arshad, senior associate at Mackrell Solicitors, a London-based law firm, in an interview with CoinDesk.

But pursuing that goal may mean keeping a company going takes a backseat to facilitating the return of funds to affected lenders or investors should the issuer collapse, Arshad said. In addition, crypto firms under the FMI SAR may pay administrative fees similar to those established under the existing regime. These are paid after the administration order is granted by the court, which the BoE would have had to apply for – under current rules – when a firm fails and needs help to continue, Sadler said.

Plus some believe returning funds to customers can be difficult to achieve.

“This measure could pose real problems for many firms, which may struggle to prove ownership of crypto assets in the event of an insolvency,” said James Alleyne, legal director at Kingsley Napley. “This is likely to be exacerbated by the lack of ownership details on the underlying ledgers and the pseudo-anonymous nature of the technology.”

Last year, several major crypto companies filed for bankruptcy. Collapsed platforms such as FTX and Celsius are now embroiled in lengthy and complex bankruptcy proceedings, where courts and judges have struggled to decipher who owes what.

Without a custody regime, which protects crypto assets from being used against the costs of insolvency, the owners of such assets could lose money if a firm goes under, Alleyne said.

The BoE’s regime would allow systemic DSA providers to continue operating in a crisis. The BoE may need to consult with the FCA before appointing a qualified liquidator to handle the winding-up of a systemic stablecoin firm that they both regulate. The FCA is currently responsible for registering crypto firms to operate in the UK using anti-money laundering rules.

“Whilst having another regulator involved always has the potential to increase processes and red tape, in practice there is no reason why this should not work smoothly and it can also help ensure better outcomes for consumers,” Alleyne said .

A special administration order allows regulators to appoint experienced liquidators to oversee companies without their consent in the event of a catastrophic failure, said Kathryn Willis, who previously worked at the FCA and is now chief executive of ONE. These administrators can liquidate affected companies with the goal of returning as much money to consumers as possible, or take over the operation of the business for continuity purposes, Willis said.

The BoE can step in when there are problems with the fiat currency reserves backing a stablecoin, such as if a stablecoin is not fully backed by reserves when it should be, Willis said.

The regime will be set up to address systemic stablecoins and DSAs and their providers, but no stablecoin or DSA in circulation can currently be considered systemic.

“This is preemptive legislation, they anticipate wider adoption and ownership of this particular asset,” said Ryan Shea, an economist at Paris-based crypto trading platform Trakx.

“If all the banks moved to deposit stablecoins, it would definitely be systemic,” said Kene Ezeji-Okoye, co-founder of Millicent, a UK provider of distributed ledger technology.

“The bad mortgages that fueled the 2008 global financial crisis were worth about 15% of the US broad money supply, causing international systemic damage,” Ezeji-Okoye said in a statement. “So one would expect that the threshold for a stablecoin to be classified as systemic in the UK is far lower than 15% of the money supply – the collapse of a stablecoin with a mid 9-figure market capitalization could well cause ripples in the system.”