Bank of England ‘killing’ UK stablecoin ambitions, body warns
The Bank of England risks “killing” London’s potential to become a global hub for stablecoins with its “prescriptive” rules, an industry body has warned, as it called for the rapid creation of a regulatory regime to support use of the digital assets.
London’s dominance of the foreign exchange market, in which it accounts for as much as 40 per cent of global trading, could pave the way for the capital to become the “Eurodollar market for stablecoins” according to a report by Innovate Finance.
But the UK’s chances of gaining a foothold in the $200bn industry is being thwarted by Bank of England’s position over holding limits and asset-backing requirements, the report said, as it urged the Bank to “publicly walk back” from the proposals and end its “bias towards incumbents and legacy systems.”
Under the latest proposals laid out by the Bank, regulated stablecoins would be subject to holding limits of as little as £20,000 while issuers would be unable to offer interest to customers and would be forced to back the assets with central bank deposits.
Innovate Finance has instead called for the scrapping of deposit limits as well as allowing issuers to offer a yield to customers via digital wallets and permitting the coins to be backed with other high-quality liquid assets such as gilts and money market funds.
The Bank has “tended to view stablecoins as a risk to stability,” the report said, adding that its approach is “out of kilter with other regimes and kill any opportunity for the UK to be a leading market for stablecoin trading and for corporate and wholesale services and transactions; it would in effect prevent all the growth benefits.”
Innovate Finance instead argued that the Bank of England should be “given an innovation objective” to encourage new technologies and innovation in payments, while officials should be “working with firms” to understand the nature of any systemic risks posed by the coins.
The stablecoin market has grown hugely over the past year, adding billions in value each month, and is now thought to be worth nearly $240bn.
Unlike cryptocurrencies, the digital assets are backed 1:1 with liquid assets and are designed to be pegged to a reference asset, typically a fiat currency, curtailing their volatility.
The speed with which the assets can be traded has raised concerns that rapid outflows in times of stress could destabilize the banking system if use of the coins became widespread.
But according to Innovate Finance, “relying on slow and outdated technology in order to limit risks…is the stability of the graveyard.”