Japan and the UK Explore Bank-Style Safeguards for Crypto and Stablecoins — Will Other Countries Follow?

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Key Takeaways

• Regulators in Japan and the U.K. are considering insurance mechanisms for the crypto sector.

• Crypto exchanges in Japan could be required to maintain user protection funds.

• The Bank of England is mulling an emergency liquidity backstop for stablecoin issuers.

For years, the lack of guarantees equivalent to government-backed deposit insurance has hampered crypto adoption. But regulatory developments in the U.K. and Japan could change that.

As they develop frameworks for crypto exchanges and stablecoin issuers, authorities in both countries are exploring how the state could support greater confidence in digital financial products.

Japan Considers Emergency Crypto Reserve Mandate

While Binance and Huobi (now known as HTX) created the first crypto exchange contingency funds in 2018, the concept has been adopted much more broadly since the collapse of FTX.

Today, over a dozen global exchanges, including major players like OKX and Bitget, have established similar emergency reserves. 

Up until now, exchanges have done this voluntarily. But in Japan, the Financial Services Agency (FSA) has proposed making user protection funds mandatory.

The FSA’s proposal marks a significant step toward the establishment of legally enforced insurance mechanisms for the crypto sector.

Yet, it still falls short of the kind of protections applied to bank deposits.

Toward Bank-Level Trust

In the event of a bankruptcy or deposit run, crypto exchanges lack a shared pool of emergency funds available to bail out a sinking ship, and the government doesn’t guarantee user deposits.

Without a government guarantee, crypto firms, including stablecoin issuers, may never attain the level of trust placed in traditional financial institutions.

Until now, companies like Tether, Circle, and Paxos have managed to keep up with redemptions through multiple market meltdowns. B

In a worst-case scenario where they couldn’t, affected stablecoin holders would be left with nothing but unsecured debt and potentially worthless tokens.

Bank of England Mulls Emergency Support for Stablecoins

To help build trust and confidence in stablecoins, the BoE’s proposal to regulate the sector includes an emergency backstop provision that would see the central bank step in to support fiat liquidity during a crisis.

Should a regulated issuer come under stress, the BoE would create a lending facility to fund redemptions, ensuring users can always swap stablecoins for cash.

Only GBP-denominated stablecoins deemed to be systemically important would qualify for the BoE facility.

By definition, any coins covered would be 100% collateralized with bank deposits and short-term U.K. government debt securities.

If adopted, the liquidity backstop would give stablecoins something the industry has never had before: a state-managed fail-safe that echoes the confidence deposit insurance brings to traditional banking.

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