Strong and Stable… and Safe: The Bank of England consider Stablecoin Regulation needs

In a very interesting speech by Christina Segal-Knowles (the Bank of England's Executive Director for Financial Markets Infrastructure), it has been suggested that Stablecoins 'could potentially contribute to faster, cheaper and more efficient payments with greater functionality. They could increase the resilience of payments. And they could even have long-term benefits for financial stability'.

However, such Stablecoins will need to be safe and meet age-old requirements of ‘private money’ (private money being the effective IOU you get when you deposit money at a bank - rather than public money, like Sterling issued by the Bank of England). These requirements include:

• 'A legal claim – to allow for prompt redemption at all times, for the amount initially deposited, and at no cost to the depositor; In other words – the little boy’s right in ‘Mary Poppins’ to demand that the bank ‘give him back his money.
  
  
• Capital requirements – to lower the risk of insolvency, these are calculated based on the nature of the risks issuers undertake (credit, operational, market risks); they act as a cushion to absorb losses, reducing the chances that a firm fails.
  
  
• Liquidity requirements – to ensure redemptions can be met in most circumstances – supported by eligibility for central bank facilities where relevant, to meet firms’ liquidity needs in extremis. This ensures that temporary liquidity issues arising from difficulties selling assets backing the value of stablecoins don’t result in firm failure; and
  
  
• A backstop to compensate depositors – or in this case coinholders – such as the Financial Services Compensation Scheme (FSCS) (or in other countries deposit insurance), in case of failure. This ensures that, even if a firm fails, transactional deposits up to a certain amount remain exchangeable for central bank money. Notably – one of the key responses to the Northern Rock episode was to increase FSCS coverage in the United Kingdom.'

The key harm the Bank of England appear to be focussed on preventing is instability, epitomised by run-on-the-bank scenes of previous financial crises as well as in the films Mary Poppins and in It’s a Wonderful Life.

Helpfully, the Bank of England has suggested that Stablecoin innovators may be able to answer these requirements in new ways and 'the regulatory model for stablecoins does not need to be identical to banks' – but what do you think?

Can Stablecoins be widely adopted? Do you think they will be regulated in new ways – or will they be treated as 'not so new’ banks? What sugar could help the medicine go down?

Further information can also be found in the Bank of England's Discussion Paper on Stablecoins.