Governor of the Bank of England (BoE) Andrew Bailey has called for strict regulation of stablecoins. While interacting with the press at the Institute of International Finance in Washington, Bailey said stablecoins should be regulated in the same manner as fiat currencies to ensure financial stability.
Stablecoins are less volatile versions of cryptocurrencies. Although they run on blockchains like conventional cryptocurrencies, they are usually pegged to something more stable. Many of them are pegged to fiat currencies such as the U.S dollar, but they can also be pegged to gold or other commodities.
Because of their reduced volatility, stablecoins allow users to enjoy the fast and cheap transactions that characterize cryptocurrencies without having to worry about volatility. A new category of stablecoins known as algorithmic stablecoins derive their values from the algorithm rather than fiat currency or commodity.
Stablecoins in this class have suffered many failures, which is one of the primary causes of concerns surrounding the use of stablecoins.
Stablecoins Lack an “Assured Value”
Bailey’s concerns stem from the fact that stablecoins do not have an “assured value”, implying that they don’t promise any return on investment if investors purchase them.
“As we have seen, they [the stablecoins] do not have assured value, and in the work, we have done at the Bank of England we have concluded that the public should expect assured value in digital money, and confidence in this is needed to underpin financial stability,” he said.
The purpose of stablecoins however is to serve as a digital and relatively stable medium of exchange, hence the name stablecoins. Bailey is calling for a strict regulatory framework similar to the one obtainable in legacy financial systems to ensure the safety of those using it.
He believes stablecoins have to meet the same requirements as fiat money to function effectively as a trusted medium of exchange. His position is hardly surprising as he’s a known critic of cryptocurrencies and everything pertaining to it.
He had condemned cryptocurrrencies as having no intrinsic value following the collapse of terra USD (UST) and terra (LUNA) in June last year.
Meanwhile, the new UK prime minister Rishi Sunak has openly stated his position on making the UK a friendly environment for crypto innovation. However, regulators don’t seem to be on the same page with him. He is also considering the launch of a central bank digital currency (CBDC) which will be used for transaction.
Widespread Stablecoin Criticism
The UK central bank isn’t the only bank that has criticized stablecoins and other cryptocurrencies. In the U.S where many have suffered loses due to bank collapses, vice chairman of the Fed Michael Barr has called for regulation of stablecoins just last month. This stemmed from concerns on the widespread adoption of stablecoins without proper regulation.
Like the UK, several governments around the world are exploring the launch of CBDCs in their respective jurisdictions. If successful, these will be the digital version of their fiat currencies which will enjoy stability and probably be a good replacement for stablecoins.
However, there have been criticisms in some quarters that CBDCs are instruments of control and should not be accepted by the populace. While this is the case with Nigeria that has very little adoption, China has seen overwhelming adoption of its own CBDC locally and is now considering its use for international settlements.
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