The Bank of England (BOE) is focusing on stablecoins, specifically those used for payments, as part of its work on digital assets. BOE Deputy Governor, John Cunliffe, likened stablecoin use cases to the evolution of the iPhone, offering “greater efficiency and functionality in payments”. The BOE is developing a regulatory framework to oversee stablecoins used for payments, stating that systemic stablecoins would need to be backed by high-quality and liquid assets. The BOE’s stance is similar to that of US policymakers, with a draft of a stablecoin regulation bill proposing a two-year moratorium on new algorithmic stablecoins.
However, Cunliffe also warned of the need for limits on stablecoins to avoid disruptive change that could threaten financial stability. There is currently no framework for reimbursing consumers in the event of stablecoin failure, unlike commercial bank money, which is protected by deposit insurance. Cunliffe stated that "systemic stablecoins" would need to be backed with highly liquid assets to ensure holders can easily withdraw their funds. The BOE is working to ensure that the assets behind a stablecoin are “at all times of sufficient value to meet redemption requests”.
The British government is consulting on new regulation to address the risks posed by digital currencies to consumers while also encouraging crypto firms to do business in the UK. The Financial Services and Markets Bill includes provisions on cryptocurrency, bringing asset-backed stablecoins into the regulatory fold. The BOE is developing a digital version of the British pound, which would provide the most efficient and effective route to developing the machinery for tokenized transactions to settle in central bank money.
Cunliffe warned of potential risks to financial stability as stablecoins gain in popularity. He suggested that initial limits on stablecoins may be needed to avoid disruptive change, adding that the BOE cannot know for certain the extent and speed at which payment stablecoins might be adopted. The collapse of algorithmic stablecoin, TerraUSD, raised questions about the stability of such tokens. The UK regulators proposed regulatory oversight of payment systems such as stablecoins, where deficiencies in design or disruption to operation may threaten the stability of the UK financial system.
Stablecoins offer greater efficiency and functionality in payments. They require a regulatory framework to ensure they are backed by highly liquid assets and the assets behind a stablecoin are of sufficient value to meet redemption requests. There are potential risks to financial stability, and the BOE has called for limits on stablecoins to avoid disruptive change that could threaten financial stability. Nonetheless, the UK government is working to ensure that the country is seen as a place for crypto firms to do business, and the BOE is developing a digital version of the British pound.
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