3 - 4 minute read
Stablecoins, digital currencies pegged to the value of other assets like fiat currencies, have gained immense popularity in recent years due to their promise of stability and reliability. However, according to Bank of England (BoE) Governor Andrew Bailey, stablecoins must be regulated in the same way as commercial bank money. In a recent speech at the Institute of International Finance, Bailey expressed his concerns about the lack of assured value in stablecoins and the need for confidence in digital money to underpin financial stability.
Bailey’s speech comes in the wake of the collapse of Terra’s algorithmic stablecoin, which wiped out billions of dollars from the crypto market and raised questions about the stability of stablecoins. The U.K. government has been consulting on new rules for crypto broadly, with separate attention directed towards regulating stablecoins as payment under the new Financial Services and Markets Bill currently being debated in Parliament.
Bailey emphasized the importance of digital money having the characteristics of inside money and being regulated as such. He stated, “For stablecoins to function as money, they will need to have the characteristics of, and be regulated as, inside money,” referring to money issued by private entities like commercial banks.
Despite his concerns, Bailey did not rule out the possibility of a central bank digital currency, stating that regulators cannot rule it out entirely. He further added that the U.K. is exploring the issuance of a digital pound that could anchor the value of all forms of money, including new digital ones, and ensure maximum opportunities for innovation in payments services.
Investors also warned of the need for caution with crypto by urging them to be aware of the lack of intrinsic value in unbacked crypto. Bailey stated, “Unbacked crypto could be a bet, a highly speculative investment, or a collectible, but note that it has no intrinsic value, so buyer be very aware.”
The Bottom Line
Stablecoins have been gaining popularity due to their promise of stability and reliability, but Bailey warns that they should be regulated in the same way as commercial bank money for financial stability. The recent collapse of Terra’s algorithmic stablecoin has brought the lack of assured value in stablecoins to the forefront of the regulatory conversation. Additionally, the U.K. government is consulting on new rules for crypto, with separate attention directed towards regulating stablecoins as payment under the Financial Services and Markets Bill. Investors should exercise caution with crypto, emphasizing the importance of being aware of the lack of intrinsic value in unbacked crypto.