Bank of England Facilitates Stablecoin Integration in Wholesale Payment Systems
The Bank of England (BoE) is taking a significant step towards embracing digital currencies, particularly tokenized deposits and stablecoins, as it seeks to modernize the UK's financial system.
Tokenized deposits, digital representations of commercial bank money, are set to revolutionize the financial landscape. These programmable ledgers enable real-time, on-chain settlement, offering a significant speed and cost-efficiency advantage over traditional systems, particularly for wholesale payments.
Stablecoins, digital currencies whose value is linked to stable assets, represent a true innovation in this regard. They offer the ability to settle operations almost in real-time with lower operational costs, a feature that could transform the financial sector.
However, the BoE approaches stablecoins with caution, emphasizing financial stability and the integrity of the monetary system. The BoE Governor, Andrew Bailey, has warned systemically important banks against issuing stablecoins, preferring that they focus on issuing tokenized deposits instead. Tokenized deposits, unlike stablecoins, facilitate lending and support credit creation, a crucial aspect of the financial system.
The BoE views stablecoins as posing risks to the "singleness of money" and financial stability, particularly if a large stablecoin loses its peg, potentially destabilizing government bond markets central to financial stability.
Regarding regulatory developments, the BoE is working on a regime for systemic stablecoins, with detailed consultation expected later in 2025. This regime may allow systemic stablecoins to hold a portion of their backing assets in high-quality liquid assets instead of 100% unremunerated central bank deposits. The Bank has proposed holding limits on stablecoin exposure for individuals and businesses to manage financial stability risks arising from sudden outflows.
The BoE favors tokenized deposits over stablecoins for payments infrastructure, as they combine regulatory protections with credit creation and faster settlement. However, the Bank is considering how stablecoins could play a role within the future Digital Settlement System (DSS), with more details expected after upcoming consultations.
Sasha Mills, the executive director of the Bank of England, has charted a progressive course towards digitalization and financial innovation. He emphasizes that the tokenization of assets and smart contracts on shared, programmable registers can deepen existing markets, open new markets, and transform the way asset classes, capital, and balances are mobilized within the financial system.
Mills believes that innovation and stability are not mutually exclusive and must coexist to advance towards a more robust and digitally adapted financial system. He has emphasized that the Bank of England will adopt a more flexible and open regulatory approach towards new technologies.
By considering the controlled use of stablecoins in wholesale payments, the Bank of England is opening the door to an ecosystem where blockchain technology and traditional finance can be effectively integrated. This move is a significant step towards a more digitally adapted financial system, one that maintains a healthy balance between innovation and financial security.
Mills concluded his speech with a clear invitation to move beyond isolated demonstrations and work together to build a new generation of financial services that maintain London's prestige as the heart of the global financial system, thereby driving a digital revolution.
Tokenized deposits, backed by the Bank of England and facilitating lending, could provide a stronger foundation for the UK's financial system compared to stablecoins, as they combine regulatory protections, credit creation, and faster settlement. The Bank of England, amidst exploring the potential role of stablecoins in the future Digital Settlement System, is emphasizing financial safety by considering a regulatory regime that prioritizes stability, technological innovation, and the integrity of the monetary system.
