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(Kitco News) - The Bank of England (BoE) is planning to place usage limitations on stablecoins being used for payments in the country as it attempts to limit any negative effects the rapid introduction of digital currencies can have on the financial stability of Britain.
This revelation came from BoE Deputy Governor Jon Cunliffe during a speech given at the Innovate Finance Global Summit in London on Monday.
“These once dusty and forgotten corners of the financial system have been transformed in recent years, Cunliffe said, “And there are good reasons to believe that even more radical change is on the horizon.”
In his speech, Cunliffe covered four areas where their tokenization of money is being explored in the U.K.: Stablecoins used for payments, the tokenization of commercial bank deposits, the next stage of the Bank of England’s work on issuing a digital pound, and the Bank’s work to ensure that these new forms of money are “robust and uniform.”
Cunliffe called forecasting the direction and pace of technological innovation and the way it will interact with social and economic trends a “hazardous enterprise,” saying that oftentimes, “it is the unforeseen combination of a number of technological advances that generates radical change.”
For this reason, public authorities like the BoE have been charged with maintaining financial stability and developing forward-looking regulations.
“Playing regulatory catch-up with new technologies once they become established and adopted at scale can be very difficult – as some of the experience in recent years with social platforms and other big techs has demonstrated,” he said.
Cunliffe went on to note how the payment landscape in the U.K. has changed in recent years, with commercial bank electronic money now becoming the preferred method of payment over publicly issued money, notes and coin. As of 2021, 85% of all payments were made electronically, either through cards or bank transfers.
Now, the sector is undergoing another evolution with the rise of contactless and mobile payments, leading to the creation of new business models.
While the BoE remains dedicated to ensuring the supply of physical cash, “the recent trend away from publically-issued, Bank of England, physical money and towards electronic money issued by private sector banks is very clear,” Cunliffe said.
Similar to the FedNow system in the U.S., the U.K. is working on the development of a new central bank real-time payment system (RTGS), which will serve as the “central rail” of the current UK payments infrastructure.
“This renewal program will increase resilience and access, and offer wider interoperability, improved user functionality and strengthened end-to-end risk management of the UK’s High Value Payment System,” Cunliffe said. “The government and regulators will expand the Open Banking framework through making improvements on API performance, improving the provision of information sharing to third party providers and working towards additional functionalities, such as variable recurring payments.”
The reason for the creation of the new system was tied to “technologies that have been pioneered and refined in the crypto world, such as tokenization, encryption, distribution, atomic settlement and smart contracts.”
Some of these developments have already started making their way into conventional finance, he said, adding that “there is a great deal of experimentation and development going on, both in the crypto world and in conventional finance.”
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Cunliffe noted that there are numerous applications of this technology in the financial system, and suggested that the most important use cases have not yet been developed.
“The potential tokenization of money and development of new ways of transferring it in transactions has major implications for the Bank of England,” he said. “We are ultimately responsible for ensuring that each of the monies circulating in the UK are both robust and uniform. By robust, I mean that users can have confidence that the money will be useable and accepted in transactions. By uniform, I mean denominated in the same currency unit – Sterling – and seamlessly exchangeable for any other money in circulation on demand and without loss of value.”
The BoE Deputy Governor said that stablecoins are currently at the forefront of development in the tokenization of money.
“Stablecoins offer the possibility of greater efficiency and functionality in payments,” he said. “But they currently sit outside most of the regulated framework and it is extremely unlikely that any of the current offerings would meet the standards for robustness and uniformity we currently apply both to commercial bank money and to the existing payment systems that transfer commercial bank money between the parties to a transaction.”
Cunliffe said the BoE and Financial Conduct Authority (FCA) plan to consult on the development of regulation for stablecoins later in 2023. “The Bank of England’s regulatory framework, in line with the legislation, will cover the issuance of stablecoins which are used for payments at systemic scale, the systems for transferring the coins, and also extend to systemic service providers such as custody wallets that are an intrinsic part of the stablecoin arrangement.”
Payment systems wishing to utilize stablecoins will need to be regulated to standards equivalent to those applied for traditional payments, he said, and stablecoins used as money for payments will be required to meet equivalent standards to those provided by commercial bank money.
This includes a requirement that coins should be redeemable on demand, at par value, in fiat money. “This matches the requirement for commercial bank money and is crucial both to ensure confidence in the coins and their uniformity with other sterling money,” he said. The BoE is currently assessing whether the reserves for stablecoins will include deposits at the BoE, very highly liquid securities, or some combination of the two.
Cunliffe also suggested that there could be limits placed on stablecoins used for payments.
“While, from a public policy perspective, we want competition and innovation in payments we need to guard against rapid, disruptive change that does not allow the financial system time to adjust and could therefore threaten financial stability,” he said. “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.”
