Bank of England outlines regulatory framework for cryptocurrencies

Another country moves forward to regulate the cryptocurrency market. The Bank of England (BoE) presented this Thursday (24) an outline of what could be its first regulatory framework for crypto assets.

According to the country’s bank, while the sector remains relatively small, its rapid growth could pose risks to financial stability in the future if unregulated.

As highlighted by the BoE’s Financial Policy Committee, sector regulation must be based on “equivalence”. That is, financial services related to cryptocurrencies that perform a similar function to existing ones must be subject to the same laws.

Furthermore, the CPE said that until cryptocurrencies are fully regulated, the BoE will focus on ensuring that cryptocurrency risks are controlled in the banking sector.

Also in the statement, the bank cited concerns about the possible use of crypto-assets to circumvent sanctions:

“While crypto assets are unlikely to provide a viable way to circumvent sanctions at scale today, the possibility of such behavior underscores the importance of ensuring that innovation in crypto assets is accompanied by effective public policy frameworks to maintain broader trust and integrity. in the financial system,” said the CPE.

Growing demand for cryptocurrencies

According to a Reuters report, BoE Deputy Governor Sam Woods highlighted that the initiative to regulate the sector comes amid growing demand for cryptocurrencies in England.

Woods stated that the risks of cryptocurrencies must be “fully considered” by bank boards. In addition, they would likely need to adapt their existing risk management strategies and systems.

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

Keeping an eye on stablecoins

The document issued by the BoE also deals with stablecoins. According to the monetary authority, stable digital currencies will be closely watched. This is because there are concerns about the reserves that guarantee the stability of currencies:

“The composition of the stablecoin’s backing may, in some cases, not be sufficient to handle mass redemptions. This can create risks for the broader financial system.”

The bank further says that trust in payments could be undermined if a stablecoin fails to meet its obligations.

The BoE and Financial Conduct Authority will undertake further work on rules for stablecoins. In addition, they will consult a regulatory “model” for systemic stablecoins in 2023, the FPC said.