5 Thoughts Following Bank of England Governor Bailey’s Sept. 3rd Comments On Cryptocurrencies & Stablecoins
On September 3rd, Andrew Bailey (the Governor of the Bank of England since March 16, 2020) gave an address at a webinar hosted by The Brookings Institute. You can watch the hour long discussion below:
Or read my five highlights below.
1. There is A Cash Paradox In The UK — While The Quantity Of Cash Has Soared, Use Is Plummeting
At the start of 2004, there were £34 billion of notes outstanding. Today there are £77B. So it took 310 years to get to $34B, then 16 years for the next $43B.
However, in April 2020, the pandemic drove withdrawals down 60% from April 2019. In May, after the lockdown ended, withdrawals were still down 40% from May 2019.
So the paradox is obvious. Use of cash is declining, but the value of cash outstanding is not.
2. Innovation is Already Straining The UK Regulatory Framework
Electronic money, or E-Money, like Venmo, is money like, but it does not have the same regulatory oversight, because regulators did not want to constrain innovation. So while there is auditing of e-money providers, there is no deposit protection, and that fact is not widely appreciated by the public. As use of e-money has grown dramatically, it’s apparent that the existing regulatory framework is inadequate
Today stablecoins are largely used to facilitate trading of cryptocurrency. As they evolve in to a means of payments they must have equivalent regulatory standards to those in place for other payment types, including stability of value, robustness of legal claims, and the ability to redeem at par in fiat.
3. The Stablecoin Ecosystem Has Grown Faster Than The Regulators Ability To Regulate It
While Governor Bailey stated that the international community has agreed that no global stablecoin project (e.g. Libra) should begin operation until the legal, regulatory and oversight risks are adequately addressed, the stablecoin ecosystem is already $16B+, and global in nature. That’s bigger than the monetary base of 72 countries.
The G7 has a report due in October that will further clarify a baseline set of regulatory standards based on functions performed and risks they create. Existing standards must be updated. Coordination between regulators is key to prevent regulatory fragmentation and the regulatory arbitrage that would follow.
4. While Central Bank Digital Currencies (CBDCs) Have Many Advantages, The Risks Need To Be Better Understood
CBDCs enhance financial inclusion provide better tracking to combat crime, and enhance a governments ability to implement fiscal policy. But CBDCs raise profound questions about the shape of the financial system, the implications for monetary and financial stability, and the role of the central bank. Most notably, to what extent will CBDCs dis-intermediate the banking sector, impacting the cost sand availability of credit, and the stability of existing business models. What services should a central bank offer and what should be left for the private sector? Design choices and key technological points are being studied. Interoperability between CBDC and other systems are key, but to what extent? Privacy and data protection also need to be addressed.
5. Central Banks Need To Be Proactive And Find The Right Balance Between Competing Needs
Given the pace of innovation, Central Banks can’t afford to be passive anymore. The UK regulators are already behind in regulating e-money, and with stablecoins emerging, it’s evident that they can’t be left to fall between regulatory regimes. If stablecoins are in to be used as a means of payment, then they should meet the standards equivalent to the standards that oversee commercial bank money. The balance that central banks need to find is enabling innovation, and maintaining the stability of existing commercial banks, while providing appropriate consumer protections, and limiting regulatory arbitrage.
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