Bank of England to Regulate Stablecoins, Mulling Plans to Launch CBDC

The Bank of England (BoE) has long indicated it is interested in new forms of digital currencies such as Stablecoins and central bank digital currencies. In the past, the Bank has wondered about the impact to monetary policy and possible risk regarding the issuance of a CBDC or digital pound.

On Monday, in a Discussion Paper, the Bank of England, kicked of a conversation regarding digital money, stating that stablecoins, typically backed by fiat or another asset but issued by a private firm, would face the same regulatory standards as those attached to bank deposits.

The paper mentioned that even as the new forms of digital money are causing the latest innovation in an evolving landscape that could contribute to faster, cheaper, and more efficient payments, they also tend to carry a potential risk.

Governor of the Bank of England, Andrew Bailey, stated:

“We live in an increasingly digitalized world where the way we make payments and use money is changing rapidly. The prospect of stablecoins as a means of payment and the emerging propositions of CBDC has generated a host of issues that central banks, governments, and society as a whole, need to carefully consider and address. It is essential that we ask the difficult and pertinent questions when it comes to the future of these new forms of digital money.”

However, the U.K.’s banking regulator further stated that for these new forms of digital money to become mainstream, the public must have the same confidence in them as they have in existing forms of money.

It further means that stablecoins must promise, credibly and consistently, to be fully interchangeable with existing forms of money and must be anchored to ensuring that users have the same confidence in stablecoins as commercial bank money.

The Bank of England’s intention to pursue a CBDC has been pushed by other central banks, firstly China – a jurisdiction that is already testing a digital yuan live and in the wild, as well as private attempts by stablecoin issuers or like Diem (created by Facebook and originally called Libra) that could gain widespread support.

In the US, the Federal Rerserve is researching a digital dollar, partnering with outsiders, and planning to hold public events as it considers the potential for a CBDC.

Just this past week, the G7 meeting of finance ministers issued a statement on CBDCs declaring:

“G7 Central Banks have been exploring the opportunities, challenges as well as the monetary and financial stability implications of Central Bank Digital Currencies (CBDCs) and we commit to work together, as Finance Ministries and Central Banks, within our respective mandates, on their wider public policy implications. We note that any CBDCs, as a form of central bank money, could act as both a liquid, safe settlement asset and as an anchor for the payments system.”

The shared goal is to ensure that CBDCs are “grounded in long-standing public sector commitments to transparency, the rule of law and sound economic governance.”

The discussion paper, embedded below, addresses five core principles, as follows:

  • Financial inclusion should be a prominent consideration in the design of any CBDC. Any CBDC should have a high degree of accessibility to people, regardless of their geographic location in the UK, age, socioeconomic status, digital skills or disability.
  • A competitive CBDC ecosystem with a diverse set of participants will support innovation and offer the best chance to deliver the benefits of CBDC. Respondents agreed the Bank should provide the minimum level of infrastructure for the system to be reliable, resilient, fast and efficient. The private sector should take a leading role in responding to the needs of the end users.
  • In assessing the case for CBDC, the Bank should assess whether non-CBDC payment innovations could deliver the same benefits. An assessment of the net benefits of CBDC should therefore consider to what extent they can instead be delivered by private sector proposals.
  • A CBDC should seek to protect users’ privacy. Feedback from respondents has emphasised the importance that users place on having privacy in their transactions. As with existing forms of digital payments, there are important legal compliance arrangements that CBDC would need to meet, such as anti money laundering, countering the financing of terrorism and sanctions. Subject to meeting these the Bank should therefore seek to ensure that users enjoy a strong level of privacy from any transactions associated with CBDC.
  • While CBDC should “do no harm” to the Bank’s ability to meet monetary and financial stability, opportunities to meet our policy objectives more effectively should also be considered in CBDC exploration. The Bank is primarily focused on possible benefits CBDC might bring for ‘payments’. It is also considering the possible opportunities that CBDC may offer for monetary and financial stability.

The discussion paper is open for three months.

Bank of England new-forms-of-digital-money 2021
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