On Monday, an official at the Bank of England warned that the regulators might need to introduce limits on the use of stablecoins in payments to safeguard potential threats to financial stability.
Jon Cunliffe, deputy governor of the Bank of England, said in a speech at the Innovate Finance Global Summit (IFGS) in London, that “The Bank of England’s assessment is that over time, the financial stability risks should be manageable, including risks from the impact on the banking system.”
“But we cannot know for certain the extent and the speed at which payment stablecoins might be adopted, and we may well need limits, at least initially, to ensure we avoid disruptive change that could threaten financial stability,” he added.
He also said that it would eventually have significant implications for stablecoins such as Tether’s USDT, Circle’s USDC, and Binance’s BUSD.
Typically, stablecoins are cryptocurrency tokens that aim to mirror the value of traditional assets such as fiat currencies. Whereas, regulators are generally concerned about the assets that stimulate their value, and the potential risks they may present to the financial system if they become greater competitors to fiduciary currency.
However, volatility in the crypto markets aroused concerns about how stable such tokens truly are when TerraUSD, a so-called algorithmic stablecoin, saw its value plummet to around zero cents after investors rebalanced their money due to concerns about the technical mechanism that supports the token.
Currently, there is no foundation for consumers to be reimbursed in the event of a stablecoin failure with disparate commercial bank money, which is prevented by deposit insurance up to £85,000 ($105,100). Cunliffe said this underpinned the need to ensure the assets behind a stablecoin are “at all times of sufficient value to meet redemption requests.”
Cunliffe also said that “systemic stablecoins,” or tokens that constitute risks to the financial system, would be required to be backed with highly liquid assets to make sure holders can easily withdraw their funds.
However, such assets could include deposits at the Bank of England “or very highly liquid securities,” he added.
The British government, on the other hand, is consulting on new regulation to address the risks constituted by digital currencies to consumers, while also seeking to make sure the country is seen as a place for cryptocurrency firms to do business.
Currently, the Financial Services and Markets Bill is working its way through the U.K. parliament, which already includes some provisions on digital assets. Although that specific law, which is not yet ongoing, aims to bring asset-backed stablecoins into the regulatory fold.
Rishi Sunak, Prime Minister of the UK, is a noted financier of crypto, having set out early in the previous year to make Britain a “crypto hub” in his capacity as Finance Minister under Boris Johnson.
The U.K. is also exploring the possible issuance of a digital version of the British pound. The Bank of England said in February that it was “likely” that Britain would need a central bank digital currency if current trends around the decline in cash use continued.
On Monday, Cunliffe recapitulated that aim, saying a CBDC was “likely to be needed if current trends in payments and money … continue.” Further, he mentioned the risk of cash use diminishing and more non-bank players issuing their own digital coins.
As a result, the Bank of England, the U.K. Treasury, and industry are debating concerns over how such currencies would be executed, such as the privacy of people transacting with them and executions for financial stability.
- Published By Team Genuine Reporter