The Banking Act 2009 outlines a process for HMT to recognise systemic payment systems for regulation by the Bank. Once a payment system is recognised, the legislation gives the Bank broad supervisory powers. The Bank discharges its supervisory responsibilities through a variety of routes. Since the bank regime is risk sensitive, capital and liquidity requirements may not actually be very different in nature between the bank model and the HQLA model. Some elements of the bank model and its calibration could be tailored to reflect the lower risk of the backing assets. The advantage of the HQLA model is that it could offer a more proportionate way for stablecoins to meet the FPC expectations than being authorised as banks.
It will evaluate the main issues at hand, consider the high level design features, possible benefits and implications for users and businesses, and considerations for further work. There’s been pressure to have clear regulation in the UK for some time, given increased usage together with a growing number of scams and fraud cases relating to crypto investments. FCA research shows that 12% of UK adults now own some form of digital asset, up from 10% in 2022 and 4.4% in 2021. However, this rise in adoption is coupled with a concerning lack of consumer knowledge, with around a third of people believing they could seek recourse or financial protection from the FCA if something went wrong. The Bank of England has also warned that increased exposure to Bitcoin could jeopardize financial stability in the event of a market crash — and weaken its ability to control interest rates.
If a digital pound is launched and directly available through a wallet, then the MPC will need to consider how its interest rate decisions will filter through to the digital currency. A Central Bank Digital Currency (CBDC) is money which is issued by a country’s central bank and used for everyday purchases. It differs from currency in circulation because it isn’t physically issued through coins and notes. Instead, as the name suggests, it’s offered digitally on an electronic device like a computer.
That occurs because the majority of their liabilities, such as deposits, are on average shorter maturity than their assets. Banks’ real economy assets are typically long-term and illiquid, meaning they are not available to meet liabilities as they fall due, for example, during a stressed outflow of deposits. And non-banks may be unable or unwilling to increase their intermediation of credit as much as assumed in the illustrative scenario.Substitutability between the two could further be weakened by restrictions on rebalancing written into the non-banks’ mandates.
In most cases, it would hold deposits in liquid assets rather than back them with loans to the real economy. Similarly, if a central bank provided a CBDC, it would back the CBDC with liquid assets, as cash is at present. A migration of deposits from commercial banks to new forms of digital money might therefore imply that a higher fraction of the total stock of money in the economy would be backed by liquid assets, rather than by loans to households and companies (Figure 1.1). The emergence of new forms of digital money could also impact the Bank’s future framework for controlling interest rates.
Matters of privacy and data protection are for other authorities, such as HM Government and the Information Commissioner’s Office. But given the importance of these matters for its mission, the Bank will take a keen interest in their work. As a result, there could be a greater reliance on non-banks for credit provision.Section 3 sets outs an illustrative scenario in which commercial banks seek to maintain lending to the real economy.
As part of its responsibility for identifying, monitoring and taking action to remove or reduce systemic risks, the FPC will monitor any implications of a shift to market-based finance for UK financial stability. Like existing forms of money, new forms of digital money that are systemic could be publicly or privately provided. In this Paper, the term ‘systemic stablecoin’ – often referenced as ‘stablecoin’ for simplicity – is used to refer to those that are issued by private companies.
The main difference between the models is in the nature of the backing assets. Implementation of regulatory models (except the bank model described below) will depend on the Bank being given the necessary powers by HMT. The interaction with other parts of the framework (including the FCA’s role in relation to consumer protection) will also need to be considered (Box J). As part of this, a key requirement will be to ensure that, unless the stablecoin is operating as a bank, the backing assets for stablecoins cover the outstanding coin issuance at all times.A key requirement for stablecoins will be robust reserve management. This should ensure that, unless the stablecoin is operating as a bank, the backing assets cover the outstanding coin issuance at all times.
