Key Takeaways
- The Bank of England is involved in ongoing debates over the future of digital money.
- Central bank policy shapes the U.K.’s approach to stablecoins, CBDCs, and tokenized deposits.
- Efforts to mitigate stablecoin risks include a proposed cap on holdings.
Like many of its peers around the world, the Bank of England (BoE) is navigating a complex and at times polarizing transition to new, digital forms of money.
Those who view stablecoins as a threat believe central bank digital currencies (CBDCs) are urgently needed to provide a counterweight. Meanwhile, others remain skeptical of digital pound proposals and are happy for the private sector to take the lead.
Where the Bank of England Stands on Stablecoins vs. CBDCs
The BoE started exploring the implications of digital money way back in 2014, a month before Tether launched the first stablecoin, USDT.
Even then, the central bank raised the prospect of digital currency issuers growing into bank-like entities with power over the supply of money.
Drawing analogies with historical episodes of free banking, that early research warned that private digital currencies could lead to uncontrolled inflation if issuers were to print more money than they held in reserve.
Two years later, the BoE’s deputy governor for monetary policy at the time, Ben Broadbent, was one of the first central bankers to publicly discuss CBDCs in a speech that outlined some of the debates still raging today.
Back then, when stablecoins were still only used by a niche group of crypto traders, Broadbent downplayed the “competitive threat” from private digital currencies. CBDCs were mostly pitched as a technological fix to inefficient payment systems and a way of expanding access to central bank money other than physical cash.
Digital currency had become a major research theme for the BoE by 2020, when a seminal discussion paper first addressed the notion that CBDCs lower demand for stablecoins, which were still nascent at the time.
Since then, the central bank has fleshed out its digital pound concept. But the political questions surrounding implementation remain unanswered.
In 2022, a House of Lords report famously concluded that a retail CBDC would create more challenges than it solved. While they acknowledged the argument for a wholesale digital pound was more compelling, lawmakers suggested the advantages of CBDCs could be achieved by other, less disruptive means.
Nonetheless, at the BoE, the discussion around digital money has continued.
Private Digital Money: Threat or Opportunity?
Minutes taken at a June meeting of the BoE’s CBDC advisory group published on Tuesday, Oct. 7, suggest stablecoin concerns have risen up the agenda
Participants warned that “delays in developing a digital pound could risk entrenching private alternatives and weakening public control over digital money ecosystems.”
“Some members felt a digital pound should be seen as a response to global competition and a tool for monetary sovereignty, not merely a technical upgrade,” the minutes stated.
As stablecoin adoption has risen, BoE Governor Andrew Bailey has emerged as a prominent advocate of central bank oversight, arguing that unregulated stablecoins threaten to undermine trust in the monetary system.
Against this backdrop, the BoE previously drew up plans to limit stablecoin ownership to £20,000 for individuals and £10 million for businesses.
However, recent reports suggest the bank may have softened its stance and is considering exemptions for certain businesses.
Bailey has also changed his tune on the technology.
It would “be wrong to be against stablecoins as a matter of principle,” he stated in a recent article that recognized “their potential in driving innovation in payments systems both at home and across borders.”
While still weary of stablecoin risks, Bailey’s latest intervention suggests practical measures central banks can implement to build public trust.
Tokenized Deposits as a Third Path
In the debate over stablecoins versus CBDCs, tokenized bank deposits present a third path and yet another vision for digital money.
If stablecoins are perceived as a threat to central bank sovereignty, tokenized deposits represent a continuation of the traditional model that extends fractional reserve banking into the digital sphere.
They are generally favored among central bankers like Baily. The BoE Governor has argued that tokenized deposits provide all the advantages of stablecoins, without draining money from the banking system, which he warned could limit the supply of credit in the economy.
Even the Reserve Bank of India (RBI) has opened the door to tokenized deposits, a notable departure from its otherwise conservative stance on private digital payment systems.
Meanwhile, the U.K.’s central bank seems to preparing for a diverse payments ecosystem. Despite differences of opinion over digital pound implementation, much of the BoE’s research is focused on achieving interoperability across different forms digital of money, envisaging a world where tokenized deposits, stablecoins, and CBDCs coexist.
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James Morales is CCN’s blockchain and crypto policy reporter. He has been working in the news media since 2020, writing about topics such as payments, banking and financial technology. These days, he likes to explore the latest blockchain innovations and the evolving landscape of global crypto regulation.
With an educational background in social anthropology and media studies, James uses his platform as a journalist to explore how new technologies work, why they matter and how they might shape our future.
