Bank of England sketches out first regulatory approach to crypto


  • June 3 Deadline for Banks to Establish Crypto Plans
  • Regulators to consult in 2023 on stablecoin rules
  • BoE says regulators probably need new powers

LONDON, March 24 (Reuters) – The Bank of England on Thursday began outlining Britain’s first regulatory framework for crypto assets, saying that although the sector remains small, its rapid growth could pose risks to financial stability in the future. if not regulated.

Crypto assets have come under the regulatory spotlight amid concerns they could be used to circumvent financial sanctions imposed on Russia since its invasion of Ukraine.

“While crypto assets are unlikely to provide a feasible way to circumvent sanctions on a large scale at present, the possibility of such behavior underscores the importance of ensuring that innovation in crypto assets is accompanied by effective public policy frameworks to. … maintain greater confidence and integrity in the financial system, the BoE’s Financial Policy Committee (FPC) said in a statement Thursday.

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Crypto assets such as bitcoin and ether are largely unregulated as they lie outside the regulatory “perimeter” and would require a change in law to bring them into the full scope of UK securities regulations, a step that being analyzed by the British Ministry of Finance.

“This is likely to require expansion of the role of existing macro- and microprudential, market conduct and integrity regulators, and close coordination between them,” the FPC said.

The FPC said that the direct risks to the financial stability of cryptocurrencies are currently limited, but if the pace of recent growth continues, there will be risks in the future.

The sector grew tenfold globally between early 2020 and November 2021, and now stands at $1.7 trillion or 0.4% of global financial assets, with over 17,000 different crypto asset tokens in circulation.

Regulation for the sector should be based on “equivalence,” meaning that cryptocurrency-related financial services that perform a similar function to existing financial services should be subject to the same laws, the FPC said.

Until crypto assets come fully under the regulatory net, the BoE is focusing on ensuring crypto risks are controlled in the banking sector. The Financial Conduct Authority on Thursday told businesses that they must fully explain the risks of unregulated cryptocurrencies to consumers.

Regulators around the world are also trying to deal with crypto assets and their derivatives. Read more

Bank of England chart on Stablecoins

STABLECOIN CONDITIONS

BoE Deputy Governor Sam Woods wrote to lenders on Thursday, noting growing interest from banks and investment firms in the sector.

Bank boards should “fully consider” the risks of cryptocurrencies and will likely need to adapt their existing risk management strategies and systems, Woods told them.

“We would also expect companies to discuss the proposed prudential treatment of crypto asset exposures with their supervisors,” Woods said in reference to the amount of capital needed to cover any losses.

The BoE launched a survey on banks’ existing exposures and future crypto plans, setting June 3 as the deadline for responses.

Stablecoins, which are backed by assets or cash, that have become systemically important would need to be backed by high-quality liquid assets and loss-absorbing capital similar to that held by banks, the FPC said.

The use of deposits with commercial banks to back stablecoins would pose significant risks to financial stability if carried out on a large scale, the FPC said.

The BoE and the Financial Conduct Authority will carry out further work on stablecoin rules and consult on a regulatory “blueprint” for systemic stablecoins in 2023, the FPC said.

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Information from Huw Jones and David Milliken; Edited by Toby Chopra

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