Bank of England governor Andrew Bailey has hit out at Bitcoin’s suitability in the world of payments while unpacking the merits of using stablecoins and central bank digital currencies (CBDC) in the future.
Bailey delivered these comments and insights during a speech at the Brookings Institution virtual event held on 3 September. The speech was focused on the world of payments and the changes that are taking place in the space around the world.
Bitcoin not suitable as a payment method
The Bank of England governor did not give conventional, fully decentralized cryptocurrencies much attention in his speech.
His section on innovations in payments only briefly touched on the role that Bitcoin has had in the space and Bailey delivered a fairly critical take on the preeminent cryptocurrency. The governor went as far as saying that cryptocurrencies are not tied to money at all due to the volatility of their value.
“I will start with crypto-assets, such as Bitcoin, which have appeared in the last ten years or so. They have no connection at all to money. They may have extrinsic value – you may like to collect them for instance, and as such they are a highly risky investment opportunity. Their value can fluctuate quite wildly, unsurprisingly. They strike me as unsuited to the world of payments, where certainty of value matters,” Bailey said in his speech.
Stablecoins unpacked at length
A large section of the speech was focused on the role that stablecoins can play in the world of global payments. Bailey focused on the use of stablecoins that are used to facilitate the transfer of money, distinguishing those from other stablecoins that may be used or seen as an investment vehicle.
Bailey highlights the utility of stablecoins that work on the technology created by the cryptocurrency and blockchain space which have essentially changed the fundamentals of transferring value.
“They change not only how you pay but what you pay with – rather than a transfer of money between bank accounts, stablecoin systems transfer the asset itself – the stablecoin – from one person to another,” Bailey said.
The Bank of England governor highlighted a number of potential benefits that stablecoins could offer to the world of payments.
“For example, they could further reduce frictions in payments, by potentially increasing the speed and lowering the cost of payments (particularly if global stablecoins were to be established). Stablecoins may offer increased convenience, including via integration with other technology, such as social media platforms or retail services.”
While recognizing these potential benefits, Bailey insisted that regulatory parameters need to be put in place to ensure that stablecoins not only abide by existing financial laws but provide consumers and users with some sort of protection.
“To reiterate, a key principle for payments is that users can be confident that the instrument they use to transfer value can be converted into fiat money at any time. And, in the rare circumstances that the entity that issued that instrument fails, that there are clear rules and protections for the payment recipient and for the consumer. It is this assurance that stabilises the value of the transfer asset so that all parties in the economy can rely on it.”
Bailey says that this is a key reason why the Bank of England’s Financial Policy Committee outlined that stablecoins need to meet equivalent standards imposed on commercial banks in its Financial Stability Report. Stablecoins, in Bailey’s opinion, need to meet the same standards of stable value, legal claims and the ability to redeem at par value for fiat currency.
CBDC being explored
The Bank of England is considering and actively exploring the various possibilities of its own CBDC and published a discussion paper on the topic in March this year.
An illustrative model was built on a central bank core ledger which used payment interface providers to provide overlay services to users. The Bank of England is still working through the large amount of responses from the paper and is expecting to release more information on the subject next year.
Nevertheless Bailey highlighted the many ramifications of a CBDC being rolled out and the considerations that need to be weighed up across the financial and economic sphere:
“There are fundamental questions in play. What might a CBDC mean for monetary policy transmission – would it bring new tools and fuller, faster transmission of policy choices? To what extent would a CBDC ‘disintermediate’ the banking sector, and what impact would this have on the cost and availability of credit, and the resilience of banking business models and funding? And what services and infrastructure should a central bank offer as part of a CBDC and what might best be left to the private sector?”