Regulatory attitude softens, Bank of England proposes allowing stablecoin issuers to invest in short-term government bonds.

The Bank of England proposed on Monday that stablecoin issuers allowed for widespread use would be able to invest up to 60% of their assets in short-term government debt to support digital token assets. This move is part of a series of new regulations indicating a softening stance towards the industry. Stablecoins are digital tokens designed to maintain a constant value, typically backed by traditional assets such as government bonds. The industry is flourishing, benefiting from federal regulations passed in the United States earlier this year. Previously, the Bank of England had proposed in 2023 that stablecoin issuers must hold all their assets in the central bank, with no interest paid on these assets, a proposal that was strongly criticized by the cryptocurrency industry. Now, the Bank of England is only requiring issuers to hold 40% of their assets in the central bank. "Today's proposal marks a significant step towards implementing the UK stablecoin regime next year... We have carefully listened to feedback and amended our proposals, including how stablecoin issuers interact with the Bank of England," said Sarah Breedon, Deputy Governor for Financial Stability in the UK. The Bank of England plans to regulate only stablecoins identified as having widespread payment capabilities. Stablecoins used for non-systemic purposes, such as being mainly used as a medium for cryptocurrency trading, will not fall under the direct supervision of the Bank of England and will be overseen by the Financial Conduct Authority. At the same time, the Bank of England outlined a temporary regime for issuers previously regulated by the Financial Conduct Authority, allowing them to initially invest up to 95% of the assets supporting stablecoin in investments. However, the Bank of England maintains plans to introduce temporary limits on the value of stablecoin that individuals and businesses can hold, plans that are unpopular in the cryptocurrency industry, although exemptions may be granted to some large businesses. Such limits are not replicated in the regulatory regimes of any other major financial center. The Bank of England also indicated in a new proposal that it is considering providing central bank liquidity facilities to systemic stablecoin issuers in times of market stress, providing support when issuers are unable to sell reserve assets in the private market. It is reported that central bank liquidity facilities are emergency funding support provided by the central bank to financial institutions as a lender of last resort, similar to traditional banks borrowing from the central bank during crises. Stablecoin issuers typically sell assets on the private market (such as the bond market) for cash, but when the market collapses and they cannot sell, the central bank steps in to provide support or cash.