The regulators in the Bank of England may need to introduce limits on the use of stablecoins in payments to prevent potential threats to financial stability, an official from this institution warned the public on Monday. This has definitely caused anxiety among people who use stablecoins and other cryptocurrencies on a regular basis. But, what does this mean, exactly?
If you are someone who takes notes from Wealth regarding crypto investments, then you definitely want to know how this situation will affect people who use cryptocurrencies. Keep reading to find out.
The Bank of England is concerned
The Deputy Governor of the Bank of England is excited that there are many new possibilities and options when it comes to payments, crypto wealth and other alternatives, but he is also concerned about the stability of the financial situation in the country. Here is what he had to say.
“The Bank of England’s assessment is that over time, the financial stability risks should be manageable including risks from the impact on the banking system.”His speech at the Innovate Finance Global Summit that took place in London was powerful. Here are other things he had to say.“But we cannot know for certain the extent and the speed at which payment stablecoins might be adopted and we may well need limits, at least initially, to ensure we avoid disruptive change that could threaten financial stability.”
What are the ramifications of this new strategy introduced by the Bank of England?
The esteemed experts speculate that this could be bad news for stablecoins such as Tether’s USDT, Circle’s USDC and Binance’s BUSD. But what exactly is a stablecoin and why is the BOE considering putting limits on their use as payments? Simply put, stablecoins are crypto tokens that aim to have the same or at least similar value to traditional assets like good old regular money, also known as fiat currency. Now, the experts from the Bank of England are concerned about the assets that may downgrade the value of traditional money and the potential risks that they may pose to the financial system if they become greater competitors to fiat money.
Sure, stablecoins may be a threat to fiat money and traditional banks, but it is rather important to say that there is currently no framework for consumers to be reimbursed in the event of a stablecoin failure, such as the collapse of TerraUSD (UST), the algorithmic stablecoin of the Terra network that wiped out over £40 billion (USD 50 billion) in market capitalisation. Most people are aware that regarding a traditional bank, this is not the case.
Commercial bank money is protected by deposit insurance up to £85,000 ($105,100). Deputy Governor Cunliffe said this reinforced the need to ensure the assets behind a stablecoin are “at all times of sufficient value to meet redemption requests.”
This is a rather delicate moment when it comes to cryptos and fiat currencies. The Bank of England and the government also are aware of this. This is why they are trying to walk the line and balance those two aspects of modern financial society. The British government is diligently searching for ways to address the potential dangers posed by digital currencies to consumers, while also seeking to provide crypto firms the resources they need to do business in the country.
This is a fine line, indeed.
The future of finance
There are some innovative options that may be public in the near future. For example, the government of England is trying to modernize its fiat currency. The government is concerned when it comes to the disruptive potential of cryptocurrencies in the country and that is one of the reasons why they are exploring the option of a digital version of the British pound. The Bank of England said in February that it was “likely” Britain would need a central bank digital currency if current trends around the decline in cash use continue.
This may be one of the best ways for the Bank of England to compete with the cryptocurrencies on the UK market. But, there are many factors here to be considered. For example, the privacy of the people who are using the digitized British pound. One thing is for sure, the financial system is going through a revolution of sorts and it will be interesting to see which system provides the highest quality, public money to British citizens in the long run.
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