The Bank of England’s December 2020 Financial Stability Report devotes a section to stablecoins and says the bank is considering the potential effects on financial stability if stablecoins were to be adopted widely. The Bank is preparing a discussion paper on how the regulatory system should adapt to assure confidence in the value of stablecoins at all times, while supporting innovation, and the connection to the concept of a Central Bank Digital Currency (CBDC).
However, for systemic stablecoins backed by a much narrower range of less risky assets, and in a legally ring-fenced manner, it may be possible to design an appropriate regime that would deliver the standards of protection currently required of commercial bank money without application of the full regime applied to commercial banks. For example, one possibility could be a regime in which systemic stablecoins are backed with high-quality, highly liquid assets, such as government bonds, held in a legal structure only for the benefit of coinholders.
Another possibility would be to back systemic stablecoins with central bank money in one form or another. Such an approach exists in the UK for private issuers of physical cash in Scotland and Northern Ireland. If a stablecoin were backed only by central bank money, it would be economically similar to a CBDC.
If they meet the necessary requirements and standards, systemic stablecoins could emerge as a substitute for commercial bank deposits as a means of payment. This could mean that deposits flow out of the banking system into stablecoin ‘wallets’.
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