As the UK considers options to attract and develop the crypto industry at home, the Bank of England (BOE) has put forward several proposals for how it might regulate stablecoins to mitigate perceived financial risks.
These have included a ban on custodial wallets for stablecoin holdings. The UK crypto industry, from stablecoin issuers to Bitcoin hardliners, has predictably taken issue with the ban.
“This would be a serious misstep for the UK, risking long-term damage that is hard to unwind,” said Benoit Marzouk, CEO of stablecoin issuer tGBP told Cointelegraph.
Ban could hamper operability and competitiveness
At the heart of the BOE’s approach to stablecoins, which it recently discussed in a series of inquiries before the House of Lords, is protecting the UK banking system.
The bank argues that unhindered access to stablecoins, which can offer higher yields than traditional banking products, could lead to a run on deposits, and therefore on credit availability from UK banks.
In March, Bank of England Deputy Governor Sarah Breeden told the House of Lords Financial Services Regulation Committee that BOE is “open to other ways of achieving the objective” of credit availability.
Breeden speaks before Parliament. Source: Parliament
“But I think you would expect us as the financial stability authority to ensure that there isn’t a precipitous drop in credit to the businesses and households in the UK,” she said.
One way it believes it can affect this is through banning unhosted wallets. “There is this concept of an unhosted wallet, where you haven’t got a wallet provider who is a regulated entity ensuring that AML [Anti-Money Laundering], KYC [Know Your Customer] criteria are complied with. Unhosted wallets will not be permissible in the UK. They are permissible in the US regime,” Breeden told the committee.
For the crypto industry, it would be two steps backward. According to Marzouk, it would “wipe out hard-earned network effects.”
“If transfers are limited to registered VASPs or custodial wallets, existing GBP stablecoins […] would become in breach of regulations with holding on self-hosted or issuers would be forced into whitelisting models and re-issuing new tokens.”
Related: UK central bank is warming up to stablecoins, but says industry input is lacking
Joey Garcia, chief strategy, policy, and regulatory affairs officer at Xapo Bank, told Cointelegraph that, instead of being an update to the financial system, “this ban essentially restricts any attempt to understand and mitigate the perceived risks.”
“This would be interpreted as a signal of a hostile regulatory environment, discouraging developers and investment in the UK’s fintech sector.”
Marzouk said that it also undermines an important use case for stablecoins, namely remittances. Under the BOE’s regime, “recipients couldn’t access funds unless fully onboarded with a regulated exchange.”
Source: ORF America
“A plane without wings is no longer a plane. Likewise, a stablecoin or blockchain asset that can only be transferred to a predefined list of wallets is not truly blockchain, it is effectively e-money within a closed ecosystem and then you don’t need a separate regulation.”
Garcia also said that the utility of stablecoins would be diminished as they “derive much of their value from the ability to be held and transferred on a peer-to-peer basis on open networks.”
“This is particularly relevant for the unbanked and underbanked around the globe, for whom self-custodial wallets and regulated on-ramps can be a primary gateway into digital financial services, and access to digital dollars or digital pounds.”
Curbing such a major use case for stablecoins “kills a major strategic opportunity: Positioning the Pound Sterling, one of the strongest and most trusted currencies, as a credible alternative to USD stablecoins,” said Marzouk.
Crypto industry questions feasibility of wallet ban
Beyond the issue of competitiveness is the feasibility of implementing an unhosted wallet ban.
Susie Violet Ward, the director and co-founder of Bitcoin Policy UK, said that these rules would do little to address real illicit flows, but would rather “expand data collection, erode privacy, impose costs, and add friction and limit access through banks and intermediaries.”
Freddie New, chief policy officer at the Bitcoin Policy UK, said that the proposed policy from BOE was of “such monumental, such overweening, stupidity, that it is hard to formulate a sensible response.”
New said, “let everyone in the UK simply continue to use their ‘self-hosted wallets’ (ie ‘wallets’) without paying them a second’s more attention.”
It may not be as simple as that. The central bank does have some levers it can pull that would be particularly relevant for stablecoins. But even then, “this is extremely challenging to monitor, let alone enforce,” said Garcia.
The BOE could focus on Virtual Asset Service Providers (VASPs). Marzouk said that the bank could limit the issuance of new stablecoins into registered VASPs like crypto exchanges. In turn, these would only allow transfers to other VASPs or custodians “through the validation of existing tools that have been created for the Travel Rule regulation.”
But even this, per Marzouk, stretches the intended purpose of the Travel Rule. “The Travel Rule is designed to enable VASPs to exchange information if there’s some complaints from clients of identity theft, for example: It was not intended to restrict or prohibit self-custody.”
For Garcia, it’s neither “necessary nor feasible.” The underlying technology behind crypto wallets means that anyone can create one. “As long as the internet and public blockchains exist, a direct ban on wallet creation and use is not practically enforceable.”
It’s distinctly possible that the ban will not make it into the final version of the Bank of England’s regulations. The bank’s latest Consultation Paper on stablecoins, published in November, does not propose one explicitly.
Any changes would have to go through the standard process, led by the Treasury under the Financial Conduct Authority’s framework as defined by the 2023 Financial Services and Markets Act. “This involves formal consultation, industry input, and iterative rulemaking before any measures can be finalised,” said Garcia.
The best the industry can do to circumvent a ban is to continue engaging with policymakers, per Garcia.
“As participants within the sector, we must demonstrate the benefits of this technology clearly to address the concerns and risks that have been identified, to strengthen the case for proportionate regulation.”
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