The BoE warns that crypto will face tough scrutiny; no regulatory arbitrage

  • By Elizabeth Fry

The Bank of England said stablecoin - a cryptocurrency pegged to the sterling - will need to be regulated in the same way as bank deposits if they became widely available as a trusted form of payment. 

In a discussion paper on new forms of digital money, the BoE noted that stablecoin describes digital tokens issued by the private sector which aim to always maintain a stable value in relation to the traditional currency.   

The BoE stated that companies offering stablecoins should not enjoy “regulatory arbitrage” - that the viability of their business models must not depend on looser regulation for the same level of risk. 

“And they must not rely on making promises that they cannot guarantee to keep over time.”  

Further, the BoE said it expected issuers to have enough reserves to offer owners one-to-one redemptions for traditional cash. 

Andrew Bailey, the central bank governor, said the prospect of stablecoins and central bank digital currencies needed to be carefully considered by central banks, governments, and society. “It is essential that we ask the difficult and pertinent questions when it comes to the future of these new forms of digital money,” he said. 

“To meet expectations, a core set of features of the current banking regime need to be reflected in any regulatory model for stablecoins, Bailey continued. “These models include capital requirements, liquidity requirements and support from a central bank, and a backstop to compensate depositors in the event of failure.” 

In addition, the BoE said it has yet to decide on central bank digital currency (CBDC) but is actively exploring the opportunities and risks of doing so. To that end, the central bank will be guided by its core objectives - maintaining monetary and financial stability.  

“The feedback we received has encouraged the Bank of England to continue examining the case for a CBDC,” the BoE said in the paper. “But at the same time, the Bank received clear feedback that the ‘use case’ for a CBDC, which might justify its introduction, needed further research, refinement, and articulation.” 

Payments innovation 

Moreover, the BoE went on to say, some respondents expressed doubt that a CBDC was needed at all, given they considered that the intended benefits could be achieved through other forms of payments innovation. 

 The bank outlined key principles for future exploration of the issue including financial inclusion, privacy protection, and a lack of harm to the BoE’s ability to foster monetary and financial stability. 

Lawrence Wintermeyer, executive co-chair at Global Digital Finance, the UK crypto assets and digital finance industry lobby group said: “The UK is a leader in innovation in the finance sector and is at an important juncture where new forms of digital money offer unlocking great potential in delivering money faster, cheaper, and more efficiently to consumers and businesses.  

"The timely implementation of a CBDC in the UK will attract an influx of industry into the UK, bourgeoning new industry activity, and boosting economic growth.”