The Bank of England (BoE) began drafting a preliminary regulatory framework for cryptocurrencies and related digital assets on Thursday.
This marks an important milestone for the central bank which will now seek to regulate and monitor the rapid growth of the vertical as well as assess risks to financial stability.
The BoE confirmed that part of its motivation to advance with a regulatory framework came from fear of leaving the segment unregulated.
The BoE admitted that the unfolding war in Ukraine has also worried financial executives in Britain, for instance concerns that Russia may try to avoid sanctions using crypto.
However, this is a very unlikely scenario according to the BoE’s Financial Policy Committee (FPC) on Thursday, which was detailing the upcoming regulation.
The FPC explained that presently, crypto posed no threat to the mainstream financial system, but there were notable signs that if the two systems, ie crypto and FIAT, continue to become intertwined, systematic risks may surface.
Meanwhile the BoE is running a survey that is supposed to assess banks’ exposure to cryptocurrencies and related assets. The survey will be ending on June 3.
The FPC has already sketched out some important changes for the future. For example, stablecoins that are based on the value of currency or cash would need to be propped up by liquid assets or loss-absorbing capital, similar to banks.
Stablecoins have been cited as one of the dangers to mainstream finances as they claim to have the same value as the US or AUS dollar for example, but they are not based on anything tangible.
This model would need to change. The BoE and Financial Conduct Authority will carry out more work to try and assess how stablecoins should be best implemented.