UK Stablecoin Aspirations Face Potential Elimination by Bank of England, Report Suggests
London's Future as a Stablecoin Hub: A Tale of Prescriptive Regulations and Innovation
London, renowned for its 40% stake in global foreign exchange trading, is eying a new role: the "Eurodollar market for stablecoins." This potential shift, however, faces a challenge due to the Bank of England's (BoE) "prescriptive" rules, according to a report by Innovate Finance.
The BoE's proposed regulations split stablecoins into two categories: systemic and non-systemic. The former, subject to rigorous rules, is perceived as a barrier to London's ambition to become a global hub for stablecoins. Innovate Finance, an industry body, claims these regulations may "kill" London's potential, calling for a rapid creation of a regulatory regime that supports the use of digital assets.
The BoE's proposals include holding limits as low as £20,000 for regulated stablecoins and a requirement for issuers to back assets with central bank deposits. However, Innovate Finance advocates scrapping deposit limits, allowing issuers to offer yields to customers via digital wallets, and permitting coins to be backed with other high-quality liquid assets such as gilts and money market funds.
Innovate Finance contends that the BoE's concerns about stability are misplaced, arguing that relying on "slow and outdated technology in order to limit risks...is the stability of the graveyard." They instead propose an innovation objective for the BoE to encourage new technologies and payments innovations, and working closely with firms to understand the nature of any systemic risks posed by stablecoins.
The stablecoin market has exploded in value over the past year, reaching nearly $240bn. Unlike traditional cryptocurrencies, stablecoins are designed to be pegged to a reference asset, thus curtailing their volatility. However, the rapid trading speed of these assets raises concerns about their impact on the banking system in times of stress.
If London wants to solidify its position as a global stablecoin hub, it needs a regulatory framework that balances innovation with oversight. The BoE's current proposals risk stifling growth unless adjusted to address concerns about profitability, the "cliff-edge effect," and overly restrictive reserve requirements. Embracing innovation could position the UK as a "Eurodollar-like" market for stablecoin trading and, ultimately, foster growth in the burgeoning digital asset sector.
- In spite of London's ambition to establish itself as a global hub for stablecoins, the Bank of England's prescriptive rules are perceived as a barrier due to their potential to kill London's prospects, according to Innovate Finance.
- Innovate Finance advocates for the rapid creation of a regulatory regime that supports the use of digital assets, suggesting the removal of deposit limits, and allowing issuers to offer yields to customers via digital wallets.
- The BoE's proposals for stablecoins, including low holding limits and central bank deposit requirements, contrast with Innovate Finance's proposals, which emphasize embracing new technologies and payments innovations.
- As the stablecoin market has reached nearly $240bn, innovation in this sector could position the UK as a "Eurodollar-like" market for stablecoin trading, fostering growth in the burgeoning digital asset sector.
- However, for London to solidify its position as a global stablecoin hub, it needs a regulatory framework that balances innovation with oversight, addressing concerns about profitability, the "cliff-edge effect," and overly restrictive reserve requirements.
