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The unanimous view across the Innovate Finance ecosystem is that the proposals in the consultation paper contain a number of significant elements that will prevent a successful UK GBP stablecoin from being launched.
The organisation is calling for the central bank to remove holding limits on systemic stablecoins, improve the backing assets ratio, discount same-day redemption and reconsider of the wholesale ban.
Innovate Finance says the current proposals “provides no hope of building British stablecoin champions who can strengthen UK resilience and grow in overseas markets – the proposed regime ties both arms behind their back, and has a chilling impact on investment for all stablecoin issuers, systemic or not, because if they go on to be successful they run the risk of being subject to this regime.provides no hope of building British stablecoin champions who can strengthen UK resilience and grow in overseas markets.”
Innovate Finance emphasises that the holding limits for users will prove operationally complex and extremely expensive and require significant cross-industry build of controls that will remove citizen privacy and destroy consumer trust in stablecoin.
“No one will invest in GBP stablecoin whilst holding limits are in force,” says the agency. “We recommend an approach that combines: market surveillance; flexibility in redemption management; enabling backing assets to include commercial bank deposits; and the development of financial markets to support household and SME lending.”
The central bank’s insistince for 40% of backing assets to be Bank of England deposits makes business models unviable, states the group, constraining an issuer’s ability to invest in the infrastructure, security builds and regulatory compliance necessary to support and sustain stablecoins.
“Less costly and disruptive solutions can be deployed to ensure liquidity in the event of a run on a stablecoin: allowing backing assets to include commercial bank deposits; enabling different commercial redemption models (including fees and variable redemption periods); and allowing greater reliance on repurchase and reverse repo for liquidity,” says Innovate Finance. “Issuers should be able to choose the mix of backing assets between short-term government debt, commercial bank deposits and central bank deposits, and allow for issuers to match the 95% High Quality Liquid Asset requirement in the FCA’s proposed rule book.”
Innovate Finance also takes umbrage at the requirement for same-day redemption, claiming that this will create disproportionate requirements that the US and others have not mandated; potentially impacting KYC/AML checks; and reducing scope for innovation and competition. Instead, says Innovate Finance, the Bank of England should mirror the US approach of requiring “timely” redemption of assets for fiat and for the issuer to publish and communicate clearly a redemption policy.
Equally, the Bank’s ban on UK commercial banks issuing stablecoins should be lifted, suggests Innovate Finance: “Prevention of customer confusion about different protection levels can be achieved through outcome-based requirements rather than prescriptive branding and entity requirements. The concerns about insolvency are misplaced given that both the Bank of England and FCA regimes will have custody and safeguarding frameworks in place.”
In conclusion, Innovate Finance says that the proposed regime will kill off investments in UK stablecoins while other jursidictions forge ahead.
“Many of the established UK fintechs who are looking at establishing stablecoin products and services are increasingly looking to develop these initially in the EU rather than the UK. A number of UK FinTech unicorns have already focused their stablecoin service offerings in the EU and with USD stablecoins.
“A number of components of the bank’s proposed regime will kill any prospect of UK based and grown GBP stablecoins – and will guarantee the dollarisation of the stablecoin market. The proposed approach on matters such as backing assets and holding limits prescribe the most expensive, disproportionate and potentially ineffective mitigations for risks which can be effectively managed in other ways and are in other jurisdictions.”
Coinbase has also critised the bank of England’s policy stance. In testimony to a House of Lords stablecoin inquiry, Tom Duff Gordon, Coinbase’s vice president for international policy, warned that overly tight Bank of England and Financial Conduct Authority (FCA) proposals on capital, holding limits and rewards risk would choke off competition. That, he said, would leave the UK lagging the US Genius Act regime and Europe’s Markets in Crypto Assets Regulation (MiCA) framework in the global race to attract stablecoin innovation.
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