Regulators may need to introduce limits on the use of stablecoins in payments to prevent potential threats to financial stability, an official at the Bank of England warned Monday.
“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,” Jon Cunliffe, deputy governor of the Bank of England, said in a speech at the Innovate Finance Global Summit in London.
“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.”
That would mean significant implications for stablecoins such as Tether’s USDT, Circle’s USDC and Binance’s BUSD.
Stablecoins are cryptocurrency tokens that aim to mirror the value of traditional assets such as fiat currencies. Regulators are concerned about the assets that underpin their value, and the potential risks they may pose to the financial system if they become greater competitors to fiat money.
Volatility in the crypto markets raised questions about just how stable such tokens truly are after TerraUSD, a so-called algorithmic stablecoin, saw its value plummet to nearly zero cents when investors yanked out their funds due to fears over the technical model underpinning the token.
There is currently no framework for consumers to be reimbursed in the event of a stablecoin failure, unlike commercial bank money which is protected by deposit insurance up to £85,000 ($105,100). Cunliffe said this reinforced the need to ensure the assets behind a stablecoin are “at all times of sufficient value to meet redemption requests.”
Cunliffe said that “systemic stablecoins,” or tokens which pose risks to the financial system, would need to be backed with highly liquid assets to ensure holders can easily withdraw their funds.
Such assets could include deposits at the Bank of England “or very highly liquid securities,” he added.
The British government is consulting on new regulation to address the risks posed by digital currencies to consumers, while also seeking to ensure the country is seen as a place for crypto firms to do business.
The Financial Services and Markets Bill, which is currently working its way through the U.K. parliament, already includes some provisions on cryptocurrency. That specific law, which is not yet in force, aims to bring asset-backed stablecoins into the regulatory fold.
Prime Minister Rishi Sunak is a noted backer of crypto, having set out early last year to make Britain a “crypto hub” in his capacity as finance minister under Boris Johnson.
The U.K. is also exploring the possible issuance of examining a digital version of the British pound. The Bank of England said in February that it was “likely” Britain would need a central bank digital currency if current trends around the decline in cash use continue.
Cunliffe reiterated that aim Monday, saying a CBDC was “likely to be needed if current trends in payments and money … continue.” He cited the risk of cash use declining further and more non-bank players issuing their own digital coins.
The Bank of England, the U.K. Treasury and industry are debating concerns over how such currencies would be implemented, such as the privacy of people transacting with them and implications for financial stability.