Systemic UK Stablecoins To Use Central Bank Deposits

The Bank of England has recommended that stablecoins used in systemic payment systems should use "inside money", which maintains its value through issuers' access to central bank deposits.

In a recent discussion paper, the BoE proposed measures that would allow rapid innovation without undermining confidence in money, enabling the safe adoption of new technologies for payments.

"Inside" And "Outside" Money

Noting that "Confidence in money is fundamental to UK financial and economic stability", the report briefly describes the forms of money that are currently available in the economy.

• The first, fiat or ‘outside money’, is backed by a promise of the state, and includes both cash that is available to the public and central bank reserves that are only available to commercial banks and certain other financial institutions.
• The second, known as ‘inside money’, is issued by the private sector, predominantly commercial banks, and its value is preserved through a combination of strict regulation and issuers’ access to central bank deposits.

The BoE recommends that stablecoins that are to be used in systemic payment systems should fall into the "inside money" category. They would be subject to a regulatory regime set out by the Bank, including the requirement that they are backed by central bank deposits.

This would effectively make approved stablecoins another form of central bank money, giving users additional confidence that they were fully backed and equivalent to other forms of Sterling.

"Money-Like" Assets

The BoE also allows for circumstances where other so-called "money-like" assets might be used for payments. "Some of these are regulated to support a stable value, but issuers do not have access to central bank deposits and are subject to lighter regulation. These assets include e‐money and stablecoins issued by firms outside the Bank’s remit."

However, the Bank does not endorse the use of unbacked cryptocurrencies such as BTC for payments, on the grounds that their volatility makes them unsuitable for this purpose. "There are also assets that incorrectly purport to be money. These are not suitable for use in payments as they do not have a stable value – they include unbacked cryptoassets."

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