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Bank of England (BoE) Chief Andrew Bailey indicated that stablecoins might diminish the United Kingdom’s dependence on commercial banks, suggesting a possible alteration in the central bank’s perspective towards digital assets.
In a Wednesday piece in the Financial Times, Bailey mentioned that the existing financial framework merges money and credit establishment through fractional reserve banking, wherein banks maintain a segment of deposits while loaning out the remainder. Fractional reserve banking is a structure in which banks keep only a portion of client deposits in reserve and extend the rest as loans, thus generating new currency via credit expansion.
“The majority of the assets supporting commercial bank currency are not devoid of risk: they comprise loans to individuals and corporations,” Bailey articulated in the FT. “The system need not be arranged in this way.”
Bailey expressed it’s feasible to “partially separate money from credit provision.” Within such a framework, banks and stablecoins would exist together, while non-banks would undertake a larger share of the credit provision function. Nonetheless, Bailey warned that “it is crucial to thoroughly examine the consequences of such a transition before proceeding.”
Related: UK Finance tests tokenized sterling deposits with six leading banks
Industry resistance to stablecoin restrictions
Bailey’s remarks come after pushback from the Bank of England’s position on stablecoins by cryptocurrency industry advocacy organizations based in the UK. The entities objected to a proposal by the BoE that would impose individual limits on stablecoin holdings.
As per industry representatives, enforcing the cap would be difficult and expensive, possibly leaving the UK behind other regions in the stablecoin sector. Tom Duff Gordon, vice-president of international policy at Coinbase, stated that “no other significant jurisdiction has considered it necessary to apply caps.”
Nonetheless, Bailey’s statements might hint at a shift in direction. He made it clear that his emphasis is on the widespread implementation of stablecoins for transactions and settlements. He asserted that current stablecoins and cryptocurrencies do not yet meet the necessary criteria.
Related: UK to bolster partnerships with US on cryptocurrency issues: Report
Stablecoins to hold Bank of England accounts
In his FT commentary, Bailey noted that the bank plans to release a consultation document concerning the UK’s systemic stablecoin framework in the forthcoming months. This new structure would pertain to stablecoins meant for utilization as currency, as he elucidates, “for routine transactions or for settling tokenized core financial markets.”
He went on to emphasize that “widely utilized UK stablecoins should obtain access to accounts at the [Bank of England] to reinforce their identity as currency.” This action, Bailey clarified, is essential for establishing a framework that enables the UK to harness the advantages of stablecoins while preserving financial stability.
The statements follow Bailey’s caution regarding banks issuing stablecoins in mid-July, expressing that the BoE ought to prioritize the tokenization of deposits instead. Ensuring that stablecoins possess accounts at the central bank seems to be an indirect method for the BoE to tokenize its deposits.
Stablecoins must progress
Despite his receptiveness towards stablecoins, Bailey remarked that certain characteristics would “necessitate examination” and that the banking assets should be devoid of risk. Additionally, he proposed that stablecoins need protection against operational hazards, such as breaches, as well as standardized exchange conditions.
He stated that “it should also be plausible to foster innovation in the realm of money” and consequently “it would therefore be incorrect to oppose stablecoins.” Rather, he acknowledges their “potential in propelling innovation in payment systems.”
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