Bank of England governor Andrew Bailey has said regulation of cryptocurrencies is needed and predicted that digital money could lead to a rise in non-bank lending.
Speaking at the City UK Annual Conference, Bailey (pictured) said that while new forms of digital money present an important source of innovation, public interest must not be ignored and “tough love” on this is needed.
He said stablecoins will have backing assets, unlike a cryptoasset, and therefore have intrinsic value and have the potential to be systemic in terms of their importance for the financial systems and its stability.
Bailey said an alternative to a private stablecoin, but not a mutually exclusive one would be central bank digital money in the form of a central bank digital coin (CBDC) and stablecoins such as this or CBDC could lead to a rise in non-bank lending.
“Commercial bank money combines in one place – bank accounts – the store of value and means of payment functions of money and in doing so enables lending to the real economy,” he said.
“What if new forms of digital money – stablecoins or CBDC – result in a large scale displacement of commercial bank money which means that a higher fraction of money in the economy must be backed by high-quality liquid assets rather than by loans to the real economy, with this being necessary to preserve the stability of a now more fragmented financial system.
“In that event, real economy loans could be financed instead by more expensive sources of funding, reducing the efficiency with which commercial banks extend credit.
“This could lead to greater reliance on non-banks for credit provision as some borrowers find it cheaper to seek credit opportunities outside the banking system…
“I hope from this you can get the sense of how important this potential innovation in digital money is, and why we must – both domestically and working with international partners – ensure that we understand and respond to the public interest issues that arise here, so that we can do our job of protecting stability, but also so that innovation can happen in a world where the public interest is well defined and protected.”