In a recent speech entitled “Reinventing the Wheel (with More Automation)”, Andrew Bailey, Governor and chief executive of the Bank of England, discussed the future of digital currencies. According to Governor Bailey, we have reached the point in the cycle of innovation in payments where it is essential that we set the standards and thus the expectations for how innovation will take effect. It should not, in his opinion, happen the other way round, with the standard setting playing catch up.
Governor Bailey began his speech with a discussion of the recent history of cash, migration to electronic payments systems, and more recently the advent of cryptocurrencies. In particular, he focused on stablecoins. Governor Bailey noted that stablecoins could offer some useful benefits, such as reducing frictions in payments, by potentially increasing the speed and lowering the cost of payments, particularly if global stablecoins were to be established. He also observed that stablecoins may offer increased convenience, including via integration with other technology, such as social media platforms or retail services.
But, Governor Bailey emphasized that if stablecoins are to be widely used as a means of payment, they must have equivalent standards to those that are in place today for other forms of payment types and the forms of money transferred through them. In his view, this equivalency will ensure that they are safe and resilient and that consumers can use them with confidence.
Governor Bailey then moved to the importance of setting standards early on so that innovation can take place with confidence on what will be required. Citing work by other transnational bodies such as the G7, the G20 and the Financial Stability Board, Governor Bailey posited that stablecoins should be regulated based on the functions they perform and risks they create, and that there should be comprehensive domestic and international regulation and supervision. In his view, global stablecoins should have robust governance and risk management, and be transparent about their stability mechanisms and coinholders’ rights. Such a baseline set of expectations will help avoid regulatory fragmentation and is an important and necessary step. Existing standards must also be examined and updated where necessary.
Turning to the topic of central bank digital currency, or CBDC, he noted that while offering much potential, they also raise profound questions about the shape of the financial system, the implications for monetary and financial stability, and the role of the central bank. In Governor Bailey’s opinion, stablecoins and CBDC are not necessarily mutually exclusive. Depending on design choices, they could sit alongside each other, either as distinct payment options, or with elements of the stablecoin ecosystem, such as wallets, providing consumers with access to a CBDC. Accordingly, he reasoned that there will likely be a role for the private and public sector working together in the future of payments.
Governor Bailey closed by posing several public policy questions raised by digital currencies. He observed that the rise of stablecoins and emergence of CBDCs pose fundamental questions about the role and responsibilities of private firms and central banks in the world of payments. Who, for example, should be responsible for the integrity and security of the digital payments architecture? Digital currencies will create not just a novel form of money, but also a new payment infrastructure, which while likely bringing benefits to payment efficiency, raises questions around transparency and how resilience and consumer protection will be ensured. Governor Bailey believes central banks might be involved in this infrastructure, but he also questioned where might the role of the central bank start and stop.
Privacy and data protection issues are also a key question according to Governor Bailey. Digital currencies, depending on their design, could provide considerable information on their use, and private firms might seek to use this data. Further, the data generated could have huge opportunities for the detection and prevention of financial crime, but this must be balanced with the risk of surveillance into private financial matters. These questions, as well as issues of encouraging inclusion and promoting competition, are—from Governor Bailey’s perspective—not ones for central banks and regulators alone to answer.
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