Andrew Bailey, Governor of the Bank of England (BoE), indicated that stablecoins might diminish the United Kingdom’s dependence on commercial banks, hinting at a possible change in the central bank’s view on digital assets.
In a Wednesday article published in the Financial Times, Bailey explained that the existing financial framework merges money creation and credit through fractional reserve banking, whereby banks retain a fraction of deposits and lend out the remainder. This system generates new money through credit expansion by holding only a portion of customer deposits in reserve.
“Most backing assets for commercial bank money carry risks: they comprise loans given to individuals and businesses,” Bailey noted in the FT. “The system doesn’t necessarily have to be structured this way.”
He suggested that it may be feasible to “partially separate money from credit provision.” In such a framework, both banks and stablecoins could operate, while non-banks assume a larger share of the credit provision. Nonetheless, Bailey emphasized the need for a thorough examination of the repercussions before proceeding with such changes.
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Industry pushback on stablecoin limits
Bailey’s remarks came amid criticism from cryptocurrency advocacy groups in the UK regarding the Bank of England’s position on stablecoins. These organizations opposed a proposal by the BoE to impose individual caps on stablecoin holdings.
According to the industry groups, implementing such limits would be both challenging and expensive, potentially causing the UK to lag behind other regions in stablecoin developments. Tom Duff Gordon, Coinbase’s vice-president of international policy, stated that “no major jurisdiction has felt it necessary to impose caps.”
However, Bailey’s comments may indicate a shift in perspective. He made it clear that he prioritizes the widespread adoption of stablecoins for payments and settlements, asserting that current stablecoins and cryptocurrencies do not yet meet these requirements.
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Stablecoins to hold Bank of England accounts
In his FT article, Bailey mentioned that the bank will release a consultation paper regarding the UK’s stablecoin system in the upcoming months. This new framework would pertain to stablecoins designed for use as money, particularly “for everyday payments or for settling tokenized core financial markets.”
He emphasized that “commonly used UK stablecoins should be granted access to accounts at the [Bank of England] to validate their status as money.” According to Bailey, this step is crucial for establishing a system that allows the UK to harness the advantages of stablecoins while ensuring financial stability.
These statements follow Bailey’s caution against banks offering stablecoins in mid-July, suggesting that the BoE should concentrate on tokenizing deposits instead. The proposal for stablecoins to hold accounts at the central bank seems to be a subtle way for the BoE to tokenize its deposits.
Stablecoins need to evolve
While displaying a favorable outlook on stablecoins, Bailey remarked that certain aspects would “require scrutiny” and insisted that banking assets should be devoid of risk. He also indicated that stablecoins need mechanisms for insurance against operational risks, such as hacks, alongside standardized exchange terms.
He stated that “innovation in the form of money should be attainable” and asserted that “it would be incorrect to oppose stablecoins.” Instead, he acknowledges their “potential for driving innovation in payment systems.”
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