Regulatory transition could be 'impossible' for some stablecoins

Transitioning to the Bank of England’s proposed regulatory system could be difficult or impossible for some stablecoins, fintech experts from Warwick Business School have warned. 

It is one of a number of challenges highlighted by experts at the Gillmore Centre for Financial Technology in their response to the Bank of England consultation on the regulation of systemic payment systems using stablecoins. 

Bazil Sansom, Research Fellow at the Gillmore Centre for Financial Technology, said: “The divergence between the proposed Financial Conduct Authority and Bank of England regimes means that transitioning a stablecoin that has grown to scale under the non-systemic regime could prove difficult or even unachievable. 

“Shifting from a business model that relies on generating returns from backing assets, to a purely transaction-based revenue model, could prove a particular challenge. 

“In such cases, one regulatory pathway for stablecoins that are unable or unwilling to transition to the systemic regime might be to operate within banking regulations, if they can sustain this.”

Stablecoin regulation must respect the 'singleness of money'

Academics at the Gillmore Centre for Financial Technology said it would be reasonable to take a graduated approach to regulation depending on the scale of issuers and payment systems. 

However, they noted that the ‘singleness of money’ meant that any claim of being pounds sterling needed to be equally safe for consumers, regardless of who issued it.

Subjecting stablecoins from systemic issuers to the same standards as bank deposits, while not holding other regulated stablecoins to the same standards, would go against the singleness of money and would require consumers to be able to distinguish between different classifications of stablecoins. This could confuse consumers and undermine confidence in money and payments. 

They also warned that secondary markets for stablecoins made by dealers who trade on regular price deviations from par (meaning a stablecoin isn’t worth exactly one pound) would be inconsistent with the singleness of money, underscoring the need for stringent requirements to ensure users can easily move into and out of regulated coins.

Why regulation could create opportunities for stablecoins 

The proposed regulatory framework undoubtedly poses a number of significant challenges. However, it also offers contenders to become UK-regulated systemic stablecoins with an unprecedented advantage: access to central bank reserves, a privilege not made available in other jurisdictions. 

Under the proposed full reserve requirement, systemic stablecoins would bear striking similarities and in many respects share comparable implications with the proposed digital pound.

While work continues to proceed towards the digital pound, this proposal to establish the necessary legal framework, suggests the possibility we might see full reserve stablecoins first.

While some may view the requirement for full backing with unremunerated reserves as overly stringent, particularly considering current business models rely on income from backing assets, it also presents a significant opportunity.  

With the safety and liquidity of fully reserve-backed coins assured, stablecoins could focus on bringing value-adding innovations to the payments market. 

Further reading:

How do we keep stablecoins stable?

How should governments regulate cryptocurrency?

Central banks may use stablecoins as a route to CBDCs

Why would central banks want to issue digital cryptocurrencies?

The Gillmore Centre for Financial Technology conducts cutting-edge research at the intersection of finance and technology, aimed at three core pillars: the consumer, the firm and wider society. 

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