As the momentum behind stablecoins gathers pace, the governor of the Bank of England has warned that regulators around the world must move early to set standards that reduce risks and foster innovation.
With the Facebook-led Libra project grabbing headlines, regulators around the world have been scrambling to coordinate their response to a phenomenon that has financial stability implications.Download the document now 311.3 kb (PDF File)
Speaking at a Brookings Institution event, BofE governor Andrew Bailey stressed 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".
Specifically, Bailey raised concerns that some stablecoin proposals do not include a legal claim for coinholders, while other propose backing in instruments that may have material risk but do not have the protections of other options.
"While this might be acceptable for speculative investment purposes, it would not be for payments widely relied upon by households and businesses. Stablecoins need to offer coin holders a robust claim, with supporting mechanisms and protections to ensure they can be redeemed at any time 1-to-1 into fiat currency," said Bailey.
For global stablecoins, the regulatory response must be grounded in internationally-agreed standards, said Bailey, noting the work currently being done by the G7 and Financial Stability Board.
The governor also warned that "we will strongly consider the need for an entity to be incorporated in the UK" for any sterling retail stablecoin wanting to operate at scale in the country. This could impact Libra, which has said its payment system will support single-currency stablecoins - possibly including sterling - in addition to a multi-currency token.
Elsewhere, Bailey said that stablecoins and central bank digital currencies are "not necessarily mutually exclusive" but offered little on plans for a CBDC other than that the bank is "exploring these issues".
In his speech, the governor also hinted at possible future changes to the regulation of e-money. Bailey noted that under EMD2 and PSD2, e-money does not have a direct link to fiat money and that the safeguarding regime does not have all the features of deposit protection.
"This means that if a firm failed, holders of its ‘money’ would be forced to pursue any recovery through a corporate insolvency procedure, which would neither be quick nor guarantee their funds back."
In a Q&A after his speech, Bailey speculated that the reason for the relaxed regulatory approach was a desire to promote innovation and a belief that e-money would be a "relatively small thing".
However, if it takes off sufficiently and becomes sufficiently systemic, there may be a need to reevaluate - particularity, says Bailey, because the public probably does not understand the difference in protections.
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