This week, the Bank of Englandtook a notably forward-thinking approach to digital innovation, with Executive Director Sasha Mills stating that the bank would be “open-minded“ regarding the use of stablecoins for wholesale transactions. This perspective stands in stark contrast to a report from the Bank for International Settlements last week, which labeled stablecoins as unreliable currency.
Mills highlighted the importance of financial stability, but noted that a recent legal amendment introduced a secondary goal of innovation for the Bank, necessitating a more balanced strategy. She stated that the Bank aims to ensure “the same risk, the same regulatory outcome, while allowing innovators the opportunity to compete in providing solutions.”
Furthermore, she recognized the need for improvements in current market infrastructures. “Eventually, it may be more practical to create new systems rather than alter the existing ones,” she remarked. “In our opinion, that moment is nearing, if it hasn’t arrived already.”
Major changes in stablecoin regulations
The Bank has significantly altered its approach to stablecoins. The most notable change occurred this week when it showed a willingness to allow stablecoin usage in wholesale markets, potentially including the Digital Securities Sandbox. Nevertheless, Mills reiterated a preference for central bank money for wholesale settlements.
In terms of retail applications, the Bank has relaxed its position significantly. A discussion paper from 2023 suggested that major stablecoin issuers should hold all reserves at the central bank without earning interest. However, after receiving feedback that this model was not feasible, the Bank has decided to permit some reserves to be invested in high-quality assets such as government bonds.
The organization is worried that rapid widespread adoption could lead to a significant withdrawal of bank deposits and negatively impact credit availability. As a response, it is contemplating temporary holding limits ranging from Ā£10,000 to Ā£20,000 for individuals and Ā£10 million for companies.
In terms of wholesale transactions, the Bank is working on a synchronization system akin to Germany’s Trigger solution, which will facilitate DLT transaction settlements via the primary RTGS payment system. Additionally, it has recently initiated a DLT Innovation Challenge in collaboration with the BIS, and Mills expressed support for the UK’s efforts on tokenized deposits, likely alluding to the Regulated Liability Network initiative.
The Bank anticipates a “mixed ecosystem” where both traditional and modern financial systems coexist, potentially on a permanent basis. Mills emphasized the importance of interoperability to prevent liquidity fragmentation, arguing that having separate liquidity pools within isolated old and new systems would offer limited advantages.
The Director mentioned that the Bank is observing viable solutions that utilize public blockchain networks as connectivity layers, which do not compromise the security and regulatory standards of private systems, such as on-chain financial market infrastructures.
She concluded by stating that it is time to move beyond discussions of potential and isolated demonstrations of technology, urging everyone to collaborate in creating a new generation of the financial system that reflects Londonās status as the center of the global financial landscape.
