Central Bank of England greenlights stablecoins for large-scale transactions
The Bank of England (BoE) has announced a cautious yet progressive approach to the use of stablecoins and tokenized deposits in the UK's financial system. This regulatory strategy aims to strike a balance between innovation and financial stability.
Stablecoins, digital currencies linked to stable assets such as fiat currencies or bonds, are no longer viewed with suspicion but are seen as potential catalysts for transforming wholesale payments. The BoE is preparing to consult on a systemic stablecoin regime, which may include requirements such as allowing some backing assets to be remunerated through investment in High Quality Liquid Assets (HQLA), and setting holding limits to mitigate financial stability risks from large deposit outflows.
However, BoE Governor Andrew Bailey has warned banks, especially major global banks, against issuing stablecoins themselves. Instead, he prefers tokenized deposits, blockchain equivalents of conventional deposits, as they support bank lending. Stablecoins, which require ringfenced reserves that cannot be lent out, could potentially reduce credit availability and harm economic growth.
The BoE has expressed concerns about stablecoins impacting financial stability and the singleness of money. A large stablecoin losing its peg could trigger disruptive sales in government bond markets, central to financial stability. Governor Bailey, who also chairs the global Financial Stability Board, emphasizes that this is a significant global issue for financial and monetary policy.
To prevent financial instability risks, the Bank is considering transitional holding limits for stablecoins in systemic payment systems. Proposed limits might be around £10-20k for individuals and £10 million for businesses, though these proposals are still under consultation.
The BoE recognizes the valuable role that stablecoins can offer in modernizing payment infrastructure without compromising financial system stability. The regulatory approach will be more flexible and open, allowing for the exploration and safe leveraging of new technologies.
Tokenized deposits, digital representations of commercial bank money, recorded in programmable ledgers that enable real-time, on-chain settlement, are also being embraced by the BoE. The Bank is exploring the integration of tokenized deposits as part of the regulated financial system.
Sasha Mills, the executive director of the Bank of England, has charted a progressive course towards digitalization and financial innovation. The use and development of asset-backed digital currencies are no longer heavily limited by the Bank of England.
Stablecoins offer several advantages, particularly in high-value transactions within wholesale markets due to their less volatility compared to other cryptocurrencies. The use of stablecoins could facilitate international operations, reduce operational costs, and increase transparency.
By considering the controlled use of stablecoins in wholesale payments, the Bank of England is opening the door to an ecosystem where blockchain technology and traditional finance can be effectively integrated. This approach contrasts with more permissive stances elsewhere, reflecting the BoE's emphasis on money integrity, credit support, and minimizing systemic risks in the UK financial system.
Mills emphasized that the tokenization of assets and smart contracts on shared, programmable registers can deepen existing markets, open new markets, and transform the way asset classes, capital, and balances are mobilized within the financial system. The Bank's regulatory approach towards stablecoins and tokenized deposits aims to promote a more agile, secure, and competitive financial ecosystem.
Stablecoins, digital currencies connected to stable assets, could transform wholesale payments in the business sector and are seen as potential catalysts for such transformation by the Bank of England (BoE). Furthermore, the BoE is examining the integration of tokenized deposits, blockchain equivalents of conventional deposits, into the regulated financial system, as they support bank lending and offer the potential for modernizing payment infrastructure without compromising financial system stability.
