The Bank of England has warned that the rise of digital currencies could lead to a flood of withdrawals from high-street banks, risking financial stability, and the wider economy. Threadneedle Street said that stablecoins would need to be regulated in the same way as payments handled by banks if they became widely available.
This new digital currency is similar to bitcoin, but does not suffer extreme price movements as they are designed to move in lockstep with government-backed currencies such as the pound or euro, or commodities such as gold, which are less volatile. While these new forms of money can be issued by private companies, they could also be issued by a central bank such as the Bank of England. Most UK households and businesses already use central bank money in the form of cash, and private money in the form of bank deposits.
In a research paper assessing the impact of new currency adoption, the BoE warned that large number of consumers moving their deposits away from current and savings accounts, and into digital assets, could undermine the stability of high-street banks. It said the overall impact on lending and credit provision would probably be “relatively modest”, however there was a large degree of uncertainty.
Governor Andrew Bailey said the prospect of stablecoins and central bank digital currencies needed to be carefully considered by central banks, governments and society as a whole. “It is essential that we ask the difficult and pertinent questions when it comes to the future of these new forms of digital money.”
Meanwhile, the Bank is currently learning whether to launch a central bank digital currency, dubbed by the chancellor, Rishi Sunak, as “Britcoin”. However, it said it had not made a decision about whether to proceed, but was looking into the risks and opportunities of doing so.