Banks cautioned against issuing stablecoins, as advised by the Governor of the Bank of England, according to recent reports.
The US House is currently considering the Genius Act, focusing on stablecoins, a digital currency designed to maintain a stable value. However, central banks, including the Bank of England, have expressed concerns about these digital assets.
Governor Andrew Bailey of the Bank of England has warned the world's largest banks not to issue stablecoins, citing potential risks to monetary policy and financial stability. He prefers banks to stick to tokenized deposits, as they support bank lending activities and are fully regulated within a country's existing financial framework.
Stablecoins, especially those denominated in foreign currencies like the US dollar, can lead to currency substitution or "dollarization," which may undermine a country's monetary sovereignty. This can complicate the implementation of monetary policies and potentially destabilize domestic financial systems.
The widespread use of stablecoins can also interfere with the transmission of monetary policy, affecting banks' ability to control interest rates and inflation. Furthermore, the growth of stablecoins can lead to new liabilities for banks if they issue them, complicating the management of financial risk.
Central banks are also concerned about the regulatory risks and lack of oversight associated with stablecoins. They often operate under less stringent regulatory frameworks compared to traditional banking systems, posing risks for illicit activities or financial instability if not properly regulated.
Stablecoins can also disintermediate traditional banking activities such as deposit-taking and lending, potentially diminishing banks' role in the financial system and affecting credit availability. Moreover, stablecoins, especially large ones, invest heavily in safe assets like US Treasuries, which can crowd out other investors and influence market yields, potentially destabilizing financial markets during times of stress.
However, tokenized deposits offer advantages over stablecoins. They are typically issued and regulated within a country's existing financial framework, ensuring that the central bank retains control over monetary policy. Tokenized deposits are more likely to be fully regulated and backed by traditional banking systems, reducing the risk of financial instability. Furthermore, they operate under established regulatory frameworks, which can mitigate risks associated with stablecoins.
Despite these concerns, the US has shown support for stablecoins with President Trump issuing an executive order favouring their use in the US. The US Senate has also passed the Genius Act, aiming to encourage demand for Treasury bills from stablecoin issuers to lower interest rates and the cost of servicing Federal debt.
In the UK, the Bank of England will be one of the two primary stablecoin regulators, overseeing the largest stablecoins. However, the Bank of England's approach on stablecoins is at odds with current US policy.
While Societé GénéraleFORGE, a subsidiary of the French bank, has already issued a stablecoin, other banks such as Standard Chartered, Santander, ING, and Deutsche Bank's asset management arm DWS are exploring the topic but haven't made formal announcements yet.
A potential counterargument is that if stablecoins are easily redeemable, then singleness should be preserved, provided stablecoins don't drop significantly below their one-to-one peg. However, the potential risks and challenges associated with stablecoins remain a topic of concern for central banks worldwide.
[1] Bank for International Settlements (BIS), (2020). "Central bank digital currencies: foundational issues." [2] Financial Stability Board (FSB), (2019). "Report on global stablecoin arrangements." [3] International Organization of Securities Commissions (IOSCO), (2019). "Statement on virtual asset trading platforms and initial coin offerings." [4] Bank of England, (2019). "Central bank digital currencies: opportunities, challenges, and design choices."
- The Bank of England, in alignment with other central banks, has expressed concerns about stablecoins due to potential risks to monetary policy, financial stability, and the interference with the transmission of monetary policy.
- Governor Andrew Bailey of the Bank of England has urged banks to avoid issuing stablecoins, advocating for tokenized deposits instead, as they are fully regulated and support bank lending activities.
- Stablecoins, particularly those in foreign currencies, can lead to currency substitution or "dollarization," which may undermine a country's monetary sovereignty and complicate the implementation of monetary policies.
- Central banks are also wary of the regulatory risks and lack of oversight associated with stablecoins, which often operate under less stringent frameworks and pose risks for illicit activities or financial instability if not properly regulated.
