Bank of England Proposes Stablecoin Safeguards

The Bank of England is drafting regulations to protect against the collapse of major stablecoin issuers, focusing on ensuring funds are returned to customers during a crisis.

As global regulators grow concerned about stablecoins’ potential systemic risks, the U.K. is joining efforts to establish targeted regulations for cryptocurrencies pegged to the value of other assets.

Following the collapse of Terra’s algorithmic stablecoin terraUSD (UST), regulators like the Bank of England (BoE) are determined to establish safeguards to protect citizens against future stablecoin collapses.

The BoE is concerned about the increasing integration of stablecoins into the financial system and its potential impact on financial stability. To address this, it plans to establish a regime to monitor stablecoins that could affect the financial system. A consultation on the proposed regulations is expected in the coming weeks.

The BoE’s proposed stablecoin regime includes several key objectives. One such objective is to ensure the return of funds to investors if a large stablecoin issuer collapses. This additional objective aims to give consumers confidence in the stability of stablecoins as a means of payment.

To implement this objective, the BoE is looking to amend the Financial Market Infrastructure Special Administration Regime (FMI SAR) to cover large digital settlement assets, including stablecoins. The FMI SAR acts as an insolvency regime, allowing critical crypto businesses to continue operating to prevent negative financial stability impacts.

However, ensuring the return of funds to customers in the event of a stablecoin issuer’s collapse may pose significant challenges. The lack of ownership details on underlying ledgers and the pseudo-anonymous nature of blockchain technology could complicate efforts to return funds to affected investors.

Despite these challenges, the BoE’s stablecoin regime aims to allow systemic stablecoin providers to continue operating during a crisis while ensuring that consumers are protected. As stablecoin adoption grows, regulators take preemptive measures to mitigate potential systemic risks associated with stablecoins and digital settlement assets.