The Bank of England (BoE) released a consultation paper setting out policy positions for a proposed regulatory regime for sterling-denominated systemic stablecoins for UK payments, issued by non-banks.
“We are clear on the outcomes we want to achieve: avoiding a disorderly transition that undermines financial and monetary stability and access to credit, while at the same time, not stifling innovation in payments and money,” the BoE wrote.
The BoE proposes to allow systemic stablecoin issuers to receive a return on a proportion of their backing assets. Systemic stablecoin issuers would be allowed to hold up to 60% of their backing assets in short-term sterling-denominated UK government debt. At least 40% would need to be held as unremunerated deposits at the central bank.
“Our proposal aims to ensure that systemic stablecoin issuers have enough liquid assets to meet unanticipated and rapid redemptions requests. We believe this can be achieved via central bank deposits, which provide an issuer with immediate access to funds if coinholders seek to redeem large volumes of stablecoins in a short period of time,” the central bank wrote.
The proposed threshold of at least 40% unremunerated deposits held at the BoE aligns with its estimates of possible short-term redemption requests. These estimates are based on outflow rates that have occurred during stress events in traditional and crypto asset markets.
Consistent with emerging regimes internationally, holdings of sterling-denominated UK government debt would be restricted to short-term maturities only.
“We believe that restricting holdings of sterling-denominated UK government debt to short-term maturities only will minimize market risk – the risk that the market value of backing assets falls below the value of coins in issuance – as market prices of short maturity debt are more stable than those with a longer maturity. Lower market risk means that issuers can put aside lower shortfall reserves,” the BoE wrote.
Settlement in core wholesale financial markets
The proposal also references a stablecoin used as a settlement asset in core wholesale financial markets by financial market infrastructures (FMIs) regulated by the central bank with reference to the Central Securities Depository Regulations (CSDR), for example to settle corporate bond trades.
Under current laws, stablecoins cannot be used by regulated FMIs for the settlement of transferable financial securities as captured under CSDR. The BoE and FCA plan to permit live transactions with financial instruments using certain regulated sterling and non-sterling stablecoins as a settlement asset in the Digital Securities Sandbox (DSS).
This activity will be subject to the limits applied within the DSS (to the issuance of securities) and the securities issued and traded in the DSS can be used outside of the DSS. If usage in the DSS proves successful, the BoE would expect to recommend to the finance ministry that the issuer of stablecoins used for settlement in core wholesale financial markets is recognized as either a payment system or service provider (where relevant) and if HMT agrees, it would be jointly regulated by the BoE (under this regime) and the Financial Conduct Authority (FCA) (under its authorisation regime for qualifying stablecoin issuers).
Associated changes to the regulations covering wholesale market settlement in central securities depositories as well as other elements of this regime, such as limits, may also be required.