The governor of the Bank of England has called for regulation of stablecoins to help facilitate their innovation as a system of payment.

Speaking at a virtual event at the Brookings Institution yesterday, Andrew Bailey pointed out that “as regulators it is not in our interest to stop innovation”, before detailing the recent shift away from cash as the UK’s primary payment method.

Until recently in the UK, cash accounted for the largest number of payments - by number not value - but the use of cash in transactions was already declining before the COVID pandemic.

“At their lowest during the UK lockdown, cash withdrawals were 60 per cent lower in April 2020 than a year before,” Bailey mentioned. “Even as the UK lockdown has eased, cash withdrawal volumes have remained low - in July they were around 40 per cent lower than the year before.”

In terms of alternatives, he mentioned cryptoassets – describing them as a highly risky investment opportunity. “Their value can fluctuate quite wildly, unsurprisingly – they strike me as unsuited to the world of payments, where certainty of value matters.”

E-money, which has grown in Europe under the second Electronic Money Directive (EMD2) and the second Payment Services Directive (PSD2), was also shot down as Bailey said standards were less developed than those for banks, plus there is no depositor protection scheme and firms are subject to only limited capital and liquidity requirements.

Stablecoins however, “could offer some useful benefits”, he stated.

“For example, they could further reduce frictions in payments, by potentially increasing the speed and lowering the cost of payments - particularly if global stablecoins were to be established - and may offer increased convenience, including via integration with other technology, such as social media platforms or retail services.”

However, Bailey stated that if stablecoins are to be widely used as a means of payment, they must have equivalent standards to those that are in place today for other forms of payment types and the forms of money transferred through them.

There is still work to do though, as he noted that some stablecoin proposals do not include a legal claim for coin-holders, while others propose backing in instruments that may have material market, credit and liquidity risk, but do not have money protections.

“While this might be acceptable for speculative investment purposes, it would not be for payments widely relied upon by households and businesses,” commented Bailey. “Stablecoins need to offer coin-holders a robust claim, with supporting mechanisms and protections to ensure they can be redeemed at any time one-to-one into fiat currency.”

He continued: “We must therefore set standards early on so that innovation can take place with confidence on what will be required – this gives certainty not only to regulators and users but also to innovators.”

Laying out further proposals, Bailey said that if a sterling retail stablecoin wishes to operate at scale in the UK, “then we will strongly consider the need for an entity to be incorporated in the UK”. But he added that global issues require a global response, particularly for multi-currency stablecoins intended for cross-border transactions.

Along with the G7, the Financial Stability Board has been leading co-ordination of the international response to global stablecoins. The FSB consulted in April on the regulatory and supervisory challenges they present, with a final report due in October, and Bailey said that the Bank of England supports the efforts to set a baseline set of expectations.

“Coordination between regulators is essential too,” he said. “In particular, host regulators of global stablecoins must, and are, working with other regulators in other jurisdictions to ensure that they are appropriately regulated and gaps in coverage, opportunities for regulatory arbitrage, do not emerge.”

Moving on to Central Bank Digital Currencies (CBDCs), Bailey said he still wasn’t convinced there was enough demand at present.

“CBDC, whilst offering much potential, also raise profound questions about the shape of the financial system and the implications for monetary and financial stability and the role of the central bank – there are fundamental questions in play.”

Some of those included what might a CBDC mean for monetary policy transmission; to what extent would a CBDC ‘disintermediate’ the banking sector; and what services and infrastructure should a central bank offer as part of a CBDC and what might best be left to the private sector?

The Bank of England published a discussion paper on CBDC earlier this year, setting out key considerations and an illustrative model based on a central bank core ledger and private payment interface providers offering overlay services to users.

Bailey said the paper received a wide range of responses, and his colleagues are currently working through them, with more information due to be published next year.

“Stablecoins and CBDC are not necessarily mutually exclusive,” he stated. “Depending on design choices, they could sit alongside each other, either as distinct payment options, or with elements of the stablecoin ecosystem, such as wallets, providing consumers with access to a CBDC.”

Bailey also stressed the need to continue to enhance existing infrastructure, including by renewal and harmonisation of RTGS systems, and working on initiatives like the UK’s New Payments Architecture.

In conclusion, he said that “we have reached the point in the cycle of innovation in payments where it is essential that we set the standards and thus the expectations for how innovation will take effect”, adding that “it should not happen the other way round, with the standard setting playing catch up”.

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