The United Kingdom Parliament Treasury Committee held a meeting on Jan 10 to discuss financial stability, including the role of digital currencies in it. One of the main topics of interest was Bitcoin (BTC), the leading cryptocurrency by market capitalization, and its suitability as a payment method. Bank of England (BOE) Governor Andrew Bailey and Deputy Governor Sarah Breeden expressed their views on Bitcoin and other digital currencies, highlighting the challenges and risks they pose to the financial system.
Bailey reiterated his previous statement that unbacked cryptocurrency has no intrinsic value, meaning that it is not backed by any asset or authority. He said that Bitcoin’s use as a payment method is “pretty inefficient”, citing its high volatility, energy consumption, and transaction costs. He added that Bitcoin is “not taking off” and losing momentum as a core financial service.
Breeden agreed with Bailey’s assessment, stating that the lack of a regulatory framework for cryptocurrency is hindering its progress in traditional finance. However, she noted that the situation is changing, as more countries are developing rules and standards for digital currencies. She also mentioned that the BOE is monitoring the developments and innovations in the crypto space, as well as the potential implications for financial stability.
Stablecoins are opaque and need proper regulation, says Bailey
Another digital currency that drew attention from the BOE officials was stablecoin, a type of cryptocurrency that is pegged to a fiat currency or a basket of assets. Stablecoins aim to provide stability and reduce volatility, as well as offer faster and cheaper transactions than traditional payment methods.
However, Bailey raised concerns about stablecoins, calling them “opaque” and presenting challenges to regulators. He emphasized the need for stablecoins to be properly regulated, as they could pose risks to the financial system if they are not backed by sufficient reserves or subject to adequate oversight. He said that stablecoins should meet the same standards as other payment systems, such as security, reliability, and transparency.
Breeden also pointed out the potential for stablecoins to disrupt the monetary system, as they could affect the demand for fiat currency and the transmission of monetary policy. She said that the BOE is working with other authorities to ensure that stablecoins are appropriately regulated and supervised.
CBDC or Britcoin is still under debate, says Breeden
The BOE officials also briefly touched on the topic of central bank digital currency (CBDC), or “Britcoin” as they called it in the meeting. CBDC is a digital form of fiat currency that is issued and controlled by a central bank. CBDC could offer some benefits, such as enhancing financial inclusion, improving efficiency, and reducing costs. However, CBDC also poses some challenges, such as privacy, security, and scalability.
Breeden said that the debate on CBDC is still ongoing, as there are many issues to consider, such as the design, implementation, and impact of CBDC. She said that the BOE is exploring the pros and cons of CBDC, as well as the potential effects on the financial system and the economy. She also mentioned that the BOE is collaborating with other central banks and international organizations to share knowledge and experience on CBDC.
The BOE’s December Financial Stability Report indicated that authorities are considering policy choices for stablecoins and CBDC. The report also reviewed previous findings and recommendations, highlighting the need to mitigate financial stability risks arising from the potential for a greater proportion of deposits to be withdrawn from the banking system in a stress scenario.
The BOE’s stance on digital currencies reflects the cautious approach taken by many central banks towards Bitcoin and other cryptocurrencies. Central banks are concerned about the potential risks posed by cryptocurrencies to financial stability and are working to develop appropriate regulatory frameworks. At the same time, central banks are also exploring the opportunities and challenges of CBDC, as a possible alternative or complement to existing payment systems.