The United Kingdom’s central bank, the Bank of England (BoE), has issued a warning about the threat posed by cryptocurrencies on the banking system. This is according to statements made by Jon Cunliffe, the BoE deputy governor in charge of the country’s financial stability, while delivering a speech at the London School of Economics on Feb. 28.
The deputy governor warned that the emergence and increasing prominence of a cryptocurrency economy would adversely affect the banks credit issuance. Specifically, Cunliffe warned that the capability for integration of stablecoins on social media platforms could create an opening for people to move their funds from banks to cryptocurrency wallets.
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 deputy governor, who also doubles as the British envoy to the European Union (EU), further added that cryptocurrencies pose ‘very important questions’ for the government, regulators and central banks. In this regard, he urged regulators and central banks from other nations to get ready to handle the unique challenges stemming from the cryptocurrency ecosystem. This, he viewed is a more practical approach rather than waiting until the issues become systematic.
Cunliffe concerns seem valid considering he is in charge of ensuring that the British financial system works safely and reliably. This is uphill task with the BoE acknowledging that there is little difference between 18th century and the modern financial system with both having their ledgers updated manually by clerks.
On the other hand, cryptocurrencies rely on a self-auto-updating triple entry ledger powered by blockchain technology. Additionally, stablecoins provide more benefits such as low transaction costs especially for cross-border fund transfers. They also carry the promise of broadening financial inclusion as they are more accessible and cheaper as compared to banks, especially among the unbanked population.
Such benefits make stablecoins more appealing to the masses, which in turn poses a future threat to the financial system. As such, Cunliffe has asked to regulators to prepare in order to address the risks that may result from mass adoption of stablecoins.
Particularly, the deputy governor cited Libra, as a major concern for the banking industry considering the size of its primary backer, Facebook, the social media giant. He appealed to the regulators to take action before stablecoins such as Libra have a systemic footprint that could very quickly become systemically important.
On this note he stated that the Financial Stability Board (FSB) would provide a guidance report with regulatory recommendation for stablecoin within the year.
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