Stablecoin regulation must not be delayed, and must balance risk mitigation with innovation

Today, the cross-party House of Lords Financial Services Regulation Committee has published its report, ‘Stablecoins: waiting for regulation’.

The report concludes that a sterling stablecoin could bring benefits such as fast and low-cost payment options, greater efficiency in settlement, and innovations such as programmable payments which could complement other forms of money and drive competition in the payments sector. Stablecoins also bring potential risks to financial stability, the possible disintermediation of the traditional banking sector, and concerns about consumer protection. The use of stablecoins for illicit purposes is also a significant concern globally.

The committee says the UK has a mature financial services industry, so it should be seeking to enable a GBP stablecoin market to be established and grow. A successful stablecoin market could allow the UK to provide wider services in the stablecoin ecosystem which would create new and emerging business opportunities.

The committee supports much of the Bank of England and the Financial Conduct Authority’s regulatory proposals for stablecoins. The requirement for stablecoin issuers to back stablecoins 1:1 is important, and the proposed backstop lending facility from the Bank is welcome.

However, the report notes that the UK’s regulatory regime would diverge from international equivalents in the requirements for systemic issuers to hold unremunerated backing assets and have holding limits on stablecoins, and in the restrictions on commercial banks issuing stablecoins.

The report’s recommendations include ensuring that regulatory frameworks are sufficiently flexible to allow for future use cases for stablecoins. The regulatory response should not constrain use cases or make assumptions about the applicability of particular digital settlement solutions to use cases, but should be agnostic on whether and how the use cases will be adopted.

The committee also says regulators should ensure that in regulating stablecoins they are not inadvertently applying a more severe risk lens than they do for other forms of payment. Regulators should seek to encourage safe and responsible innovation in the UK stablecoin market and remain open to new technological developments.

The regulators must adhere to current timelines and ensure that the final regulatory regime is not delayed in order to bring certainty and confidence to allow the GBP stablecoin market to develop, the report says. It also recommends that the Bank should reconsider its requirement to hold at least 40% of backing assets in unremunerated central bank deposits.

In addition, the committee argues the Bank should not pre-emptively impose holding limits, and should use them only if the financial stability risks warrant it, because they could unnecessarily inhibit the growth of GBP stablecoins and prove impractical to implement.

The report further recommends that the PRA should alter its requirements for deposit-takers to issue stablecoins under distinct branding and from insolvency-remote entities. HM Treasury should also consider with the Bank of England and FCA whether the existing legal frameworks are sufficient to detect and deter illicit activity using private unhosted wallets, and be prepared to legislate to restrict their use if necessary.

The Baroness Noakes DBE, Chairman of the House of Lords Financial Services Regulation Committee, said:

“The global stablecoin market is dominated by US dollar stablecoins and evolved to serve cryptoasset trading. New uses for stablecoins are emerging and regulators globally are setting up regulatory regimes. The UK is lagging behind compared with the US and the EU but is now moving in the right direction.

“The committee support much of what the Bank of England and Financial Conduct Authority are proposing. There are, however, elements of the proposals which should be reconsidered, particularly in relation to holding limits, unremunerated backing assets, and restrictions on commercial banks issuing stablecoins.

“No-one knows whether or how a UK-based stablecoin market could develop. Regulation needs to allow innovation while ensuring that risks are effectively mitigated. The shape of any UK stablecoin market will be strongly influenced by the direction of the regulatory regime, and so it is important that the regulators get this balance right.”

For more information, or to request an embargoed copy of the report, please contact: Dervish Mertcan [email protected] / 020 7219 6640