Stablecoins could improve efficiency in the payments sector but will need to be backed by “high quality and liquid assets” to meet the Bank of England’s regulatory standards, deputy governor Jon Cunliffe said today.
In a wide ranging speech on the state of the payments sector, Cunliffe detailed the Bank’s work to ensure new forms of money are robust and uniform.
Cunliffe suggested that stablecoins – a form of digital currency pegged to a ‘stable’ reserve asset like the US dollar or gold, for example – could make payments more efficient, but that most would fail to meet the Bank’s standards for “robustness and uniformity”.
In order to meet these expectations, stablecoins will either have to be backed by deposits at the Bank or “highly liquid securities”, or some combination of the two.
He argued that any stablecoin should be restricted to payments rather than maturity transformation, the process of borrowing short term funds to make long term investments.
Cunliffe also said it will not be possible to give stablecoin holders funded protection against failure of the coin. “This reinforces the need to ensure that the backing assets are at all times of sufficient value to meet redemption requests,” he said.
He also suggested that there may have to be limits in place on stablecoins in order to prevent against “disruptive change” that fails to allow the financial system time to adjust.
Later in the speech, Cunliffe reiterated the Bank’s assessment of a digital pound, dubbed Britcoin, arguing that a central bank digital currency (CBDC) could “anchor the value and robustness of all monies circulating in the UK”.
Cunliffe argued that cash usage is likely to decline, which will make cash itself less useable in everyday transactions. With new forms of payments such as stablecoins developing, a CBDC could take over the role currently provided by cash in maintaining the unity of the payments system.
Although the digital pound is intended for retail purposes, Cunliffe suggested that it could apply to the wholesale market too.
“We recognise very clearly the potential transformative effect on wholesale financial markets of tokenisation of financial assets,” Cunliffe said, arguing that there has been a misunderstanding of the Bank’s position.
“The question is not whether but how we should develop the machinery for tokenised transactions to settle in central bank money,” he said.
In February, the Bank launched a consultation on the digital pound, arguing that it was “likely” to be necessary.
The consultation on the digital pound will run for four months before the project will enter the design phase. A final decision is expected to be made in 2025.