Crypto stablecoins may need limits, Bank of England warns

Regulators may need to impose 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 the risks to financial stability should be manageable, including risks from the impact on the banking system,” Jon Cunliffe, deputy governor of the Bank of England, said in a speech at the Innovate Finance Global Summit in London.

“However, we cannot know with certainty the extent and speed at which stablecoins may be adopted, and we may well need limits, at least initially, to ensure that we avoid disruptive changes that could threaten financial stability.”

That would mean significant implications for stablecoins like Tether’s USDT, Circle’s USDC, and Binance’s BNB.

Stablecoins are cryptocurrency tokens that aim to mirror the value of traditional assets such as fiat currencies. Regulators are concerned about the assets that underpin their value and the potential risk they could pose to the financial system if they become bigger competitors to raise money.

Volatility in the crypto markets raised questions about how stable such tokens really are after TerraUSD, a so-called algorithmic stablecoin, saw its value plummet to almost zero cents as investors pulled their money due to fears about the technical model underlying the token.

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

Cunliffe said “systemic stablecoins,” or tokens that pose risk to the financial system, must be backed with highly liquid assets to ensure holders can easily withdraw their money.

Such assets could include deposits with the Bank of England “or highly liquid securities,” he added.

The UK government is consulting on new regulation to address the risks digital currencies pose to consumers, while trying to ensure the country is seen as a place for crypto firms to do business.

The Financial Services and Markets Bill, currently working its way through the UK Parliament, already contains some provisions on cryptocurrency. The specific law, which is not yet in force, aims to bring asset-backed stablecoins into the regulatory fold.

Prime Minister Rishi Sunak is a known supporter of crypto, having set out early last year to make the UK a “crypto hub” in his capacity as Chancellor of the Exchequer under Boris Johnson.

The UK is also investigating the possible issuance of a digital version of the British pound. The Bank of England said in February that it was “likely” that the UK would need a digital central bank currency if current trends around the decline in cash usage continue.

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

The Bank of England, the UK Treasury and industry are discussing concerns about how such currencies will be implemented, such as the privacy of people who trade with them and implications for financial stability.

SEE: How stablecoins became the backbone of crypto