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Stablecoins could form a major part of the shift in the financial system away from reliance on commercial banks for lending, Andrew Bailey has said, a softening of stance from the Bank of England governor towards the digital assets.
In an article for the Financial Times on Wednesday, Bailey said it would be “wrong to be against stablecoins as a matter of principle”, noting their potential for “driving innovation in payments systems both at home and across borders”.
Stablecoins are digital tokens that are pegged at a fixed rate of one-to-one to a real currency. A cornerstone of cryptocurrency trading, they have sparked a heated debate among regulators.
Some have warned that they represent a threat to the stability of global finance, while others have backed them as a promising innovation that can make payments cheaper and faster.
In his Mansion House speech in July, Bailey said he did not see stablecoins as a substitute for commercial bank money. But on Wednesday, he wrote that the financial system “does not have to be organised” as it is now, with a heavy reliance on commercial bank lending to fund the economy.
“It is possible, at least partially, to separate money from credit provision, with banks and stablecoins coexisting and non-banks carrying out more of the credit provision role,” Bailey said, adding that it was “important to consider the implications of such a change thoroughly before going ahead”.
Stablecoins worth almost $300bn are in circulation, dominated by US dollar-based products such as Tether’s USDT and Circle’s USDC. Citigroup analysts predict the market could be worth up to $4tn by 2030. There are no pound-based stablecoins of significant size.
The BoE has been criticised for taking a more conservative approach to stablecoins than other central banks, particularly since the US Congress passed the Genius Act in July, setting the stage for mainstream adoption of the tokens on Wall Street.
Former Conservative chancellor George Osborne, who now advises US cryptocurrency exchange Coinbase, has warned Britain is “being completely left behind” on stablecoins, while Reform UK leader Nigel Farage last week urged Bailey to back the development of cryptocurrency.
In his FT article, Bailey adopted a more constructive tone, noting that stablecoins used as money “enable the comparison and exchange of value and thus support the price system”.
Nevertheless, he cautioned that stablecoins had “a number of features that require scrutiny”, including whether the assets backing them should have to be entirely risk-free in order to make them “truly . . . stable”.
The threat of cyber attacks and other operational risks meant stablecoin issuers would need an insurance scheme to refund owners in a crisis and a resolution framework to ensure “their holders are preferred creditors in any insolvency process”, Bailey said. Both are likely add to the costs for issuers.
The terms of exchange for stablecoins “must be the same for all holders and must be direct into other forms of money, and not dependent on a so-called crypto exchange and its terms of business”, Bailey added. “As presently set up, not all stablecoins satisfy this condition.”
The BoE is due to publish a consultation on its plans to regulate systemically important UK stablecoins later this year.
The central bank is already being urged to ditch its plan to limit how many stablecoins people can own to £10,000 to £20,000 for individuals and £10mn for businesses, which would give the UK much stricter rules than the US or EU.
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