David Milliken and Huw Jones

LONDON, (Reuters) – The Bank of England began Thursday sketching Britain’s first regulation framework for cryptoassets. It stated that, although it remains small, the rapid growth of this sector could present risks to financial stability if not regulated.

Cryptoassets were brought to the attention of regulators because they are being feared that they may be used as a way for Russia to avoid financial sanctions since its invasion and occupation of Ukraine.

According to the BoE’s Financial Policy Committee, “While it seems unlikely that cryptoassets will provide an effective way to circumvent Sanctions at Scale currently,” they said Thursday in a statement.

The vast majority of cryptoassets such as bitcoins and ether are unregulated because they do not fall within the “regulatory perimeter”. A law change would bring them into the UK’s full range of securities rules. Britain’s finance ministry is studying this possibility.

FPC indicated that there were no immediate risks from crypto to financial stability. However, the FPC noted that if current growth rates continue, there may be some future risk.

Globally, the sector grew 10 fold between November 2021 and early 2020. It now accounts for $1.7 trillion, or 0.4%, of all global financial assets. There are over 17,000 cryptoasset tokens currently in circulation.

The FPC stated that regulation for this sector must be based upon “equivalence”, which means that any crypto-related services performing a similar function as existing services should also be subject to the same laws.

The BoE will continue to ensure that cryptoassets remain within the regulatory framework, even if they are fully brought under it. On Thursday, Sam Woods, the BoE’s Deputy Governor, wrote to banks, noting increased interest by investment firms and banks in cryptoassets.

Woods advised that banks boards should “consider all possible risks associated with crypto” and would need to adjust their risk management systems and strategies in order to mitigate them.

Woods spoke out about the capital requirements to protect losses, saying that they would expect companies to also talk with supervisors regarding the prudential treatment proposed for cryptoasset exposures.

According to the FPC, a major stablecoin (a cryptocurrency that is supported by fiat currencies or another asset) which doesn’t have a deposit assurance scheme or a regime for winding down itself if it gets into trouble could still meet its expectations if there was a regulatory framework.

It stated that the FPC considered that systemic stability coins that are backed by deposits with commercial banks would pose financial instability risks.

According to the FPC, both the BoE and Financial Conduct Authority will continue work on stablecoin rules and discuss a model regulatory structure for systemic stabilitycoins for 2023.