Bank of England sketches first regulatory approach to crypto

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

Crypto-assets are under the regulatory spotlight as they could be used to circumvent financial sanctions imposed on Russia since its invasion of Ukraine.

“While it is unlikely that crypto-assets currently provide a feasible means of circumventing large-scale sanctions, the possibility of such behavior underscores the importance of ensuring that innovation in crypto-assets comes with effective public policy frameworks to…maintain broader confidence and integrity in the financial system,” the BoE’s Financial Policy Committee (FPC) said in a statement. declaration Thursday.

Crypto-assets, such as bitcoin and ether, are largely unregulated as they fall outside the regulatory “perimeter” and a change in law would be needed to bring them into full scope UK securities rules, a step the UK Treasury is considering.

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

The FPC said direct risks to financial stability from crypto are currently limited, but if the recent pace of 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.

Industry regulation should be based on “equivalence,” meaning that crypto-related financial services that perform a similar function to existing financial services should be subject to the same laws, the FPC said.

Until cryptoassets are fully brought under the regulatory net, the BoE is focused on ensuring that crypto-related risks are controlled in the banking sector. On Thursday, the Financial Conduct Authority told companies they must fully explain to consumers the risks of unregulated crypto.

Regulators around the world are also trying to crack down on crypto-assets and their ramifications. Read more

Bank of England Chart on Stablecoins

STABLECOIN TERMS

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

Crypto risks should be “fully considered” by bank boards and they would likely need to adapt their existing risk management strategies and systems, Woods told them.

“We also expect firms 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 potential losses.

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

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

The use of commercial bank deposits to provide support for stablecoins would pose significant risks to financial stability if pursued on a large scale, the FPC said.

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

Reporting by Huw Jones and David Milliken; Editing by Toby Chopra


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