In a new discussion paper, the Bank of England (BOE) wrote that the stablecoins that are currently available in the market are not given any ‘systemic importance’.
However, this might change soon. If stablecoins that are backed by pounds are used in the UK daily, then it is likely that the impact of the crypto asset on the economy would be greater.
Therefore, if that scenario does play out, the discussion framework sheds light on a potential regulatory framework for stablecoins.
The paper talked about some of the major concerns associated with ‘unhosted’ crypto wallets due to their potential to facilitate terrorist financing and money laundering.
This would become relevant in a future where stablecoins are used the same way as sterling pounds. Unhosted wallets are also referred to as self-custody or non-custodial wallets.
These types of wallets are used for transferring and storing crypto assets without requiring third-party intermediaries and this gives users greater autonomy over their financial dealings.
The paper said that a systemic stablecoin payment chain would not be able to meet the expectations of the Financial Policy Committee (FPC) because of the risks associated with unhosted wallet providers.
In this situation, the wallet providers would also have to adhere to regulatory requirements, which include having the same consumer protection, level of resilience, market integrity, and operational reliability seen in traditional payment systems.
The paper stated that systemic stablecoin issuers would find it challenging to meet the regulatory requirements under the regime proposed by the Bank.
The FPC also stated that the recommendations of the Financial Asset Task Force (FATF) already cover the terrorist financing and money laundering risks of these self-custody wallets.
These recommendations include the ‘travel rule’ that was introduced for crypto transactions.
According to this rule, relevant information needs to be shared by financial institutions and virtual asset service providers (VASPs) about the sender and the recipient when digital asset transactions are conducted.
The Bank of England said that the paper was aimed at highlighting the exploration phase that would help in devising a new regulatory framework in the UK for governing stablecoins.
The regulator will first get feedback from the industry on the initial proposals and consider them before engaging in a consulting process for developing the final regulatory framework.
The Financial Conduct Authority (FCA) had also introduced a paper alongside this one, which highlighted their regulatory approach towards stablecoin custodians and issuers.
A roadmap paper was also published that outlined the interactions between the different regulatory frameworks.
In addition, the Prudential Regulation Authority (PRA) also sent a letter to Chief Executive Officers of banks about the innovations used in using e-money, deposits, and stablecoins by banks.
The purpose of these publications is to obtain clarity about the particular regulatory category to which each instrument or form of money belongs.