The Bank of England (BoE) together with regulatory authorities have launched a series of documents which will form the basis for a new sterling-denominated stable coin regime for Britain.

Papers published in November 2023 by BoE, the Financial Conduct Authority and a letter from the Prudential Regulation Authority provide a roadmap aimed at creating clarity over how such instruments will be regulated. 

Managing risks

“Stable coins present risks both in terms of their innovative use as a form of money or money-like instrument, and their use as a means of payment in systemic payment systems,” BoE said. “Our proposed regime aims to address both these risks.”

Under the proposals, BoE would be responsible for directly supervising the entity behind the stable coin currency. “This entity would need to be able to overview and assess all the risks arising from the different parts of the payment chain and ensure there are appropriate controls,” it said. “In addition, digital tokens would need to be fully backed by central bank deposits. 

 “In order to be used at systemic scale, any such payment system would have to assure us that a legal entity or natural person could be held accountable and responsible for end-to-end risk management in the payment system and compliance with regulation,” it said.

Global adoption

Governments in countries in Latin America and the Caribbean have been early adopters of digital money. El Salvador, for example, granted legal tender status to BitCoin in 2021. In 2020, the Bahamas launched the world’s first digital currency – the sand dollar.

The Bahamas launched the currency partly because its population is distributed across and archipelago of about 700 islands – making financial transactions sometimes problematic. The main sticking point so far has been a low adoption among its citizens “The general public’s awareness of the fundamental differences between monetary forms, affects the success of a CBDC,” a recent analysis of the project said. In the US, stable coin legislation is making its way slowly through the political system.

The Financial Times reported that no existing stablecoin would currently meet the criteria for supervision set out by BoE, but that could change rapidly after the regime is finalised.