The Deputy Governor of Financial Stability for the Bank of England, Sir Jon Cunliffe, discussed cryptocurrencies, stablecoins and central bank digital currencies (CBDC) in a recent speech at the London School of Economics. According to reports, Sir Cunliffe gave an exciting presentation on digital money. As explained by the Deputy, there’s a new wave of technological developments arising in today’s world where distributed ledger technology (DLT) is being applied to create a new category of digital assets such as cryptos and stablecoins.
According to Cunliffe, with all innovation regulation must follow. The creation of crypto assets has forced the Bank of England to develop rules that are necessary for the financial sector to understand how crypto assets can function in today’s economy. Sir Jon also took on the opportunity to acknowledge the significant improvements DLT technology brings to the table when it comes to payment systems:
Innovation and competition can lead to better, cheaper payment services in the economy. But, the payment systems on which we depend have to be reliable and robust, prudentially, and operationally. Regulation, therefore, needs to keep pace with the changes in the payments landscape and the proliferation of new actors. The same risks have to be subject to the same regulation.
The current regulatory regime focusses on the banks and core payment systems that have traditionally performed most of the functions, the ‘chain of actions,’ involved in making transactions. But as innovation and competition lengthen that chain of action and introduce more actors into it, the current regulatory framework does not capture the full ‘end to end’ risks in the chain.
Cunliffe continued on explaining how stablecoins have exposed one of the most significant flaws in existing payment rails, which are associated with costs and transaction speed. As detailed by Sir Jon, proposals like Facebook’s Libra showcase a great example of how a stablecoin could bring significant benefits to the economy when it comes to reducing costs and enhancing transaction speed.
Although the Deputy did praise Facebook’s efforts to open the economy to a broader crowd, he pointed out the associated danger that this could represent for financial stability. According to Cunliffe, stablecoins pose a potential risk related to regulatory issues, competition, data protection, AML, and counter-terrorist financing that’s still not covered by existing mechanisms.