In a recent revelation, the deputy governor of the Bank of England (BoE) has issued a warning against the use of stablecoins. The central banker can be heard saying that regulators might need to limit the use of stablecoins.
On Monday, Jon Cunliffe, the deputy governor of the BoE, said that regulators might have to limit stablecoins in payments to maintain financial stability.
Speaking at the ongoing conference of Innovate Finance, the central banker said that while the risks to financial stability from payment stablecoins should be manageable over time, there is uncertainty about their adoption rate and extent. He adds:
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.
Stablecoins are cryptocurrency tokens that in theory mirror the value of traditional assets, such as fiat currencies. Notably, this warning from the British central banker could have serious and larger implications for stablecoins and their usage.
Cunliffe emphasized that assets behind a stablecoin should be “of sufficient value to meet redemption requests.” Otherwise, to avoid a scenario where systemic stablecoins pose risks to the financial system. He suggested that such assets could include deposits at the Bank of England or very highly liquid securities.
The British government under the leadership of prime minister Rishi Sunak revealed intentions to make the nation a crypto hub but has been hindered by the central bank and the financial regulator. The FCA and BoE have shown their resistance toward crypto and the bank also predicted that crypto assets could go down to zero.
Currently, the nation is consulting on new regulations to address the risks posed by digital assets to consumers while ensuring the country remains a place for crypto firms to do business. The upcoming Financial Services and Markets Bill aims to bring asset-backed stablecoins into the regulatory fold.
In particular, the British central bank heads have appeared cold towards cryptocurrencies and have called for strict regulation. A couple of days back, while addressing the press at the Institute of International Finance in Washington, Andrew Bailey, governor of the BoE, said that stablecoins should be regulated in the same way as fiat money.
He added that stablecoins lack an “assured value,” which is one of the primary features that investors look for when putting their money in this type of “digital money” that seeks to resemble fiat.
Regulators across the globe are concerned about the assets that determine the value of these stablecoins. Some observers also fear that stablecoins pose a risk to the financial system if they become competitors to fiat money.
In addition, the recent volatility in the crypto markets raises questions about how stable such tokens truly are. The value of TerraUSD, an algorithmic stablecoin, dropped close to zero after investors withdrew funds for concerns about the token’s technical model. Last month, USDC depegged after its reserves were caught up in the collapse of Silicon Valley Bank (SVB).