UK's current bill market may not be able to support demand from stablecoin issuers

The UK government is reportedly considering expanding the Treasury bill issuance as a way to broaden the investor base for its short-term debt while bolstering the sterling currency markets. 

The plan is to go through its Debt Management Office (DMO) and is taking the steps amid escalating demand from new buyers like stablecoin issuers, who have interests in low-risk, liquid assets like the treasury bills. 

The UK’s current bill market may not be able to support demand from stablecoin issuers

Should the UK move forward with plans to ramp up its bill issuance to diversify its investor base, its sterling money markets would become further developed and be able to meet demand from potential buyers such as stablecoin issuers.

The nation’s Debt Management Office plans to launch a consultation in January on “expanding and deepening” the market for ultra-short-dated debt, a move that comes as government borrowers, including the US, continue to benefit from leaning more on their bill programs to meet financing requirements.

The DMO’s consultation builds on a report shared by the Bank of England earlier this month that claimed the current UK bill market may not be able to sustain demand from stablecoin issuers, which hold such securities in order to meet liabilities. However, the consultation does not mention the BoE’s report or the specific stablecoin plans. 

As things stand, the UK government issues bills at maturities of one, three and six months each week. In October, there was about £108 billion ($143 billion) of bills outstanding, according to DMO data.

“The government is committed to maintaining as diversified an investor base as possible, to enhance the resilience of the government’s financing programme,” the DMO said. “Any changes following the consultation will take into account an assessment of cost and risk, including implications for the government’s refinancing risk exposure.”

The DMO has also been shortening its debt-issuance strategy more broadly in a bid to meet an evolving investor base, cutting sales of long-maturity bonds to record lows as demand from defined-benefit pension funds dries up.

Comparing the UK’s stringent regulatory framework for stablecoins with the US’s

As things stand, both the UK and the US have made considerable progress on creating a regulatory framework for regulating stablecoins. However, their positions differ in terms of approach and stringency. 

The UK’s stance, proposed through the BoE’s consultation from November 10, focuses on financial stability and consumer protection via tiered oversight and strict liquidity rules. 

Meanwhile, the US has put forward the GENIUS Act, which prioritizes innovation and federal uniformity as well as exemptions from broader securities laws. This provides an encouraging and more permissive environment for stablecoin issuers, while ensuring the country can bank on a steady demand from issuers for its debt in the form of treasury bills. 

For now, the UK is in its consultation phase, asking for feedback from the industry before making the final tweaks to its regulatory framework. 

Feedback has been mostly negative so far, with many users worried about proposals like the plan to temporarily impose strict caps on stablecoin holdings, including a £20,000 ($26,350) limit for individuals and £10 million for businesses, while insisting that issuers have as much as 60% of the backing assets in short-term government debt.

While the industry has frowned upon the cap on stablecoin holdings, it has been defended as necessary and will remain until regulators are certain there won’t be any largely negative effects. 

The BoE, in a bid to ensure the UK can keep up with the US, has softened its stance on regulating sterling-denominated stablecoins in revised proposals. Despite the revision, the industry has raised concerns that the UK will struggle to catch up or even compete with the US and its more relaxed regime. 

The BoE now wants to establish its stablecoin rules as quickly as the US after seeing the positive effect of regulatory laws like the GENIUS Act on the digital assets industry. However, BoE Deputy Governor Sarah Breeden believes the UK needs to be more cautious with regulation because Britain’s financial system has a different structure, with the mortgage market relying on lending by commercial banks. 

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