Bank of England wants tight regulations for digital currencies

As more digital currency projects come to market, the Bank of England wants to ensure that stablecoins — which are designed to be equal in value to government currencies — should be regulated under the same rules as traditional money.

The BOE on Monday said it expects stablecoins to offer a one-to-one redemption with traditional currency accounts at all times with a "robust" legal claim.

Stablecoins are designed as a hedge against volatility for cryptocurrencies such as bitcoin. The BOE refers to stablecoins as private-sector digital tokens that aim to maintain a stable value in relation to national currencies.

These stablecoins should be subject to capital requirements, liquidity requirements, support from a central bank and a way to compensate depositors if the stablecoin fails.

By offering people an alternative to commercial bank money, new forms of digital money could affect the cost and availability of borrowing from banks, the Bank of England argues. "All else equal, that could make it difficult for monetary policy to ease financial conditions," the central bank's discussion paper says, adding a counter argument that new forms of digital money could increase the resilience of payments.

The most mainstream stablecoin, the Facebook-affiliated Diem, has not yet launched, though its model has been adjusted several times to address regulatory concerns, evolving from a stablecoin backed by a revolving basket of traditional currencies to a one-to-one model. Most recently Diem moved its headquarters from Sweden to the U.S. and selected Silvergate Bank as its issuer.

Other stablecoins, such as Circle's USDC, have expanded quickly. USDC has handled more than $500 billion in payments over the past 12 months, and has expanded to about 23.7 billion coins in circulation. Stablecoins additionally are part of Visa and Mastercard's plans to support payments for digital currencies.

The Bank of England also says stablecoins are developing as nations study, test and deploy central bank digital currencies, saying the prospect of stablecoins and CBDCs generate a "host of issues" that central banks and governments need to consider. Interoperability between CBDCs between nations and with other digital and traditional currencies is one of the main challenges the international CBDC pilots hope to address.

The Bank of England is researching a potential CBDC, though the age and complexity of the country's banking system make the process more complicated than it would be in other nations.

The BOE did not answer questions about how regulations could help private stablecoins and central bank digital currencies work together, and it did not address regulations for cryptocurrencies.

In the U.S., the Office of the Comptroller of the Currency in January said national banks could use stablecoins and distributed ledgers to process payments, arguing decentralized payments is part of banking's continuing evolution in moving funds.