Crypto stablecoins may need limits, Bank of England warns


The entire stablecoin market is now worth over $160 billion.

Justin Tallis | AFP via Getty Images

Regulators may need to introduce limits on the use of stablecoins in payments to prevent potential threats to financial stability, a Bank of England official warned on Monday.

“The Bank of England’s assessment is that over time risks to financial stability should be manageable, including risks related to the impact on the banking system,” said Jon Cunliffe, vice-president. Governor of the Bank of England, in a speech at the Innovate Finance Global Summit. in London.

“But we can’t know for certain how widely and how quickly payment stablecoins might be adopted and we may well need limits, at least initially, to ensure we avoid disruptive changes that could threaten financial stability.”

This 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 reflect the value of traditional assets such as fiat currencies. Regulators worry about the assets that underpin their value and the potential risks they could pose to the financial system if they become bigger competitors to fiat money.

Volatility in the crypto markets raised questions about the real stability of these tokens after TerraUSD, a so-called algorithmic stablecoin, saw its value drop to near zero cents when investors withdrew their funds due to fears regarding the technical model underlying the token.

There is currently no framework for consumers to be reimbursed if a stablecoin fails, unlike commercial bank money which is protected by deposit insurance up to £85,000 ($105,100) . Cunliffe said this reinforces the need to ensure the assets behind a stablecoin are “of sufficient value at all times to meet redemption requests.”

Cunliffe said “systemic stablecoins,” or tokens that pose risks to the financial system, should be backed by highly liquid assets to ensure holders can easily withdraw their funds.

Those assets could include deposits at the Bank of England “or very liquid securities”, he added.

The UK government is consulting on new regulations to address the risks posed by digital currencies to consumers, while seeking to ensure the country is seen as a place where crypto companies can do business.

The Financial Services and Markets Bill, which is currently going through the UK parliament, already includes some provisions on cryptocurrency. This specific law, which is not yet in force, aims to bring asset-backed stablecoins into the regulatory fold.

Prime Minister Rishi Sunak is a recognized supporter of crypto, having set out early last year to make Britain a “crypto hub” in his capacity as finance minister under Boris Johnson.

The UK is also exploring the possibility of looking at a digital version of the pound sterling. The Bank of England said in February that Britain is “likely” to need a central bank digital currency if current trends in declining cash use continue.

Cunliffe reiterated that goal on Monday, saying a CBDC “will likely be needed if current trends in payments and money…continue.” He cited the risk that the use of cash will decline further and that more non-bank players will issue their own digital coins.

The Bank of England, the UK Treasury and industry are debating concerns about how these currencies would be implemented, such as the privacy of people transacting with them and the implications for financial stability.

SHOW: How stablecoins became the backbone of crypto

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