Last week the Deputy Governor of the Bank of England, Sir Jon Cunliffe, gave a speech about money, including stablecoins and Central Bank Digital Currency (CBDC). He concluded that the form of money has always evolved and is something that can’t be held back. His biggest concern is the substitution of commercial bank money, whether by stablecoins or CBDC, which in turn could impact the availability of credit.
Referring to stablecoins, Cunliffe commented that “the supply of credit to the real economy through the banking system could become weaker or indeed disappear. That would be a change with profound economic consequences.”
Hence, he believes we should envision how money and payments might evolve in the absence of a CBDC. Reading between the lines, could money be dominated by Facebook or other big tech companies?
This relates to his other conclusion that the form of money has broader implications than finance, and includes competition, privacy, financial inclusion, and the role of the public sector, amongst other issues.
The Deputy Governor acknowledged Facebook’s and Libra’s role in highlighting the high cost of cross border payments and the potential benefits of stablecoins. However, Cunliffe outlined a long list of risks.
Stablecoins: same risk, same regulation
And he argued that the same risk should be governed by the same regulation. This relates to the end to end resilience of a payment system, which outside of crypto has regulations.
Likewise, the operation of commercial bank accounts is governed by legislation. Hence, for stablecoins there needs to be regulation around the stability of value, the ability to redeem at par and the legal claim that a stabelecoin represents.
Other regulatory issues will cover competition, data protection, anti money laundering and counter terrorist financing.
The Deputy Governor stated that stablecoins had the potential to be used beyond their initial role for payments and to become a store of value. This would, in turn, impact the banking system and the supply of credit.
The Bank of England has recommended to the Treasury’s Payments Review that regulation should reflect financial stability risk rather than legal form.
Cunliffe went on to ask whether central banks should also leverage technology to provide ongoing access to “risk-free” central bank money.
He highlighted both the opportunities and risks of a CBDC. Many risks are similar to stablecoins, and the biggest is the potential of substituting commercial bank money and its impact on credit creation. Other risks relate to liquidity and a CBDC being a potential single point of failure.
An important question is whether there is an appetite for a CBDC. A recent OMFIF/MORI survey indicated that in the UK, 50% are in favor and 36% are against.
If one were to consider a CBDC, a key question is what purpose it fills, which in turn impacts its design.
Hence there’s much to debate.
To that end, the Bank of England is collaborating with five other central banks and the BIS to share experiences.