Jon Cunliffe, the deputy governor for the financial stability of the Bank of England (BoE), warned that the rise of crypto economy may ultimately weaken or even eliminate bank credit issuance.
In a speech at the London School of Economics on 28 February, Cunliffe predicted that implementation of stablecoins on social media platforms may lead people to move their money currently held in banks into stablecoin wallets.
Jon Cunliffe noted:
Jon Cunliffe
In such a world, and depending how and whether stablecoins were backed with other financial assets, the supply of credit to the real economy through the banking system could become weaker or indeed disappear. That would be a change with profound economic consequences.
The BoE’s role is to ensure that U.K. money “works safely and reliably”, the British envoy to the European Union explained. He warned that virtual currencies pose a “very important questions” for the U.K. government, regulators and BoE.
The deputy governor appealed to regulators and central banks to prepare for unique challenges the emergence of cryptocurrency ecosystem may rise before it comes “systemically important.”
The BoE official also admitted that the current financial system is made up of “the equivalent of 18th-century bank clerks with quill pens altering their banks’ ledgers to debit one account and credit another.”
Stablecoins allegedly offer benefits like “very large reductions in the costs of payments, especially cross border,” and “greater financial inclusion through easier and cheaper access to payment services for the ‘unbanked.’”
Nonetheless, Cunliffe urges regulator to prepare for the risks that come with the stablecoins before they achieve a “systemic footprint.” The deputy governor predicts that the result of Facebook’s size, its proposed Libra stablecoin could reach adoption levels that may see it become systemically important very fast.
In his speech, Cunliffe notes that the Financial Stability Board (FSB) will issue a report analyzing “regulatory recommendations with respect to stablecoins” this year.
Randal K. Quarles, FSB chair, said earlier this month that the organization is conducting a review of its structure for evaluating vulnerabilities in the financial system in order to ensure it is at the “cutting edge of financial stability vulnerability assessment.
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