The Governor of the Bank of England, Andrew Bailey, has softened his sceptical views on the future of stablecoins in the UK, saying it would be wrong to dismiss the cryptocurrency “as a matter of principle”. Writing in the Financial Times, Bailey recognised their potential for “innovation in payments systems” but warned that the new technology “must still answer old central banking questions” to maintain public trust in money, which is “critical” to all economies.
What are stablecoins?
Stablecoin is a form of cryptocurrency, the digital currencies operated by private companies or individuals rather than central banks like the Bank of England (BoE) or the European Central Bank. Crypto, which is currently unregulated in the UK, has seen a major rise in recent years, based on risky “speculative trading”, according to the Financial Conduct Authority.
The most popular and well-known stablecoin is Tether (USDT), with other leading stablecoins including USD Coin (USDC-USD) and Stasis Euro (EURS-USD).
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How is it different from other cryptocurrency?
Unlike cryptocurrencies like Bitcoin or Ethereum, which are completely detached from centralised financial institutions, stablecoins are “pegged” to tangible assets, like US dollars, the British pound, or gold prices.
They are designed to hold a steady value, only rarely dipping above or below a designated ratio. For example, a stablecoin with perfect efficiency to the US dollar, would consistently value one “coin” as one dollar. Some stablecoins have a reserve controlled by an algorithm to generate more coins or remove coins according to supply and demand.
Why is the UK government interested in it?
The market for this category of cryptocurrency is already valued at $200 billion (£148 billion) globally. With London responsible for 40% of foreign exchange turnover, the prospect of formal UK participation in stablecoins is an attractive one, according to a report by Innovate Finance.
The attraction of stablecoin is considerable. It bypasses traditional currency conversions, and facilitates “more predictable” and “lower-cost” payments internationally, said Yahoo Finance.
The government is intent on driving forward “developments in blockchain technology”, including stablecoins, Chancellor Rachel Reeves said in her Mansion House speech in July.
The BoE aims to publish a consultation paper, setting out a blueprint for the “UK’s systemic stablecoin regime”, to ensure the UK will “reap the benefits” of the new currency, said Bailey in the FT. The BoE had previously proposed that stablecoin holdings would be capped at as little as £20,000, with no interest offered to customers.
The European Union, Hong Kong, Japan (since 2023) and the United States have all implemented rules to make trading more transparent, a step which has been broadly welcomed by the crypto community.
What are the concerns?
Stablecoins can still be risky, even when pegged to tangible assets. If a stablecoin strays too far from its target value and this cannot be corrected, it can be “depegged”.
On a larger scale, if stablecoins were left unregulated, central banks could be caught on a tightrope. If a stablecoin crashes, the fallout could trigger “fire sales” – rapid sales at significantly low prices due to financial distress – to establish an equilibrium, said Bloomberg.
Conversely, if stablecoins “prove their worth”, allowing users to exchange and store vast sums of money, the “monetary monopoly” of the banks would be undermined.
And as with other cryptocurrencies, an unregulated system can be exploited for illegal activity. Trading is “anonymous, fast and cheap”, making stablecoins highly attractive for criminals to use to conduct scams or launder funds.
