Blockchain for Banking News

UK stablecoin consultation: banks shouldn’t issue one. Stick to tokenized deposits

digital currency stablecoin pound tokenized deposit

Today the Bank of England and the Financial Conduct Authority (FCA) opened a consultation on multiple regulatory proposals for stablecoins. At the same time, the Bank of England’s Prudential Regulation Authority issued a notice to banks on the topic. It doesn’t want banks to get involved in stablecoins or e-money using their primary banking brand. The only way in which banks should use DLT for money is for tokenized deposits. Like the United States, the banking regulator also wants to be kept informed about planned digital money innovations.

A key driver of the bank restriction on stablecoins is the potential confusion for retail clients who might not understand the difference between a tokenized deposit backed by insurance versus an uninsured stablecoin. The concern is that if a stablecoin suffers a run, it could trigger a run on the entire bank. Hence, any stablecoin issuance by a banking group would have to use a separate non-deposit-taking brand and be insolvency remote.

“Stablecoins can enhance digital retail payments in the UK. With this comes the need to make sure there is robust and clear regulation in place,” said Sarah Breeden, Deputy Governor for Financial Stability, Bank of England. “Our proposals aim to support safe innovation so that firms can understand the risks they need to manage and ensure that the public can be confident in all forms of digital money and payments.”

When it comes to tokenized deposits, it would also be necessary to be able to provide a list of insured depositors within 24 hours. That might be trickier if the token is transferrable.

Large or systemic stablecoin holders will have some protections but not insurance. This includes a stablecoin trust structure, strict requirements on reserves and capital requirements. In the event of an insolvency, payouts to systemic coin holders will probably not be as fast as payouts to deposit holders.

Systemic stablecoins can’t earn interest on reserves

Previously regulators have spoken about global stablecoins and systemic stablecoin issuers similar to Diem or another big tech. They’re not making it hugely attractive from a business perspective.

For systemic stablecoins, backing assets have to be held at the central bank. However, the kicker is the issuer doesn’t earn interest on the central bank deposits. It’s not just the coin holders that don’t earn interest. Which begs the question, how do they make money? The Bank of England envisages models “which generate revenue from payment services rather than liquidity and maturity transformation.”

And they can’t get around the zero interest by being offshore. To serve UK clients, a global systemic stablecoin would have to set up a UK subsidiary and have UK-based backing assets.

Additionally, there will be holding limits for consumers to prevent a mass shift out of bank deposits.

Some stablecoins will have multiple regulators

Meanwhile, the FCA is the conduct regulator for all stablecoins and tokenized deposits. However, when it comes to prudential requirements, the Bank of England is responsible for systemic stablecoins and service providers such as wallets, and the FCA oversees the rest. All current crypto stablecoins are under the FCA remit.

The consultation runs through to February 6, 2024.

Update: the article has been substantially expanded including the sections on systemic stablecoins

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