What Is the Bank of England's Position on Digital Money?
In this significant speech, Sasha Mills articulates the Bank of England's vision for the future of money and payments in the UK. The speech addresses the role of tokenisation, stablecoins, and potential central bank digital currency in maintaining monetary and financial stability while enabling innovation.
The Bank takes a measured but constructive approach, recognizing the potential benefits of tokenised assets and stablecoins while emphasizing the need for robust regulatory frameworks to manage associated risks.
How Does the Bank View Tokenisation?
The speech outlines the Bank's perspective on tokenisation of financial assets:
Potential Benefits
- Increased efficiency in settlement and clearing
- Enhanced transparency and auditability
- Reduced counterparty and settlement risk
- Greater accessibility to financial markets
- Programmable functionality enabling new products
Key Considerations
- Legal certainty for tokenised assets and their holders
- Interoperability between tokenised and traditional systems
- Settlement finality and legal enforceability
- Custody arrangements and asset segregation
Bank Engagement
- Working with industry on tokenisation pilots
- Exploring implications for payment systems
- Considering wholesale CBDC for tokenised settlement
- Engaging internationally on standards
What Is the Bank's Approach to Stablecoins?
The speech clarifies the Bank's thinking on stablecoin regulation:
Recognition of Use Cases
- Stablecoins can serve legitimate payment functions
- Potential for improving cross-border payments
- Role in tokenised asset settlement
- Bridge between traditional finance and crypto markets
Risk Framework
- Systemic risk if stablecoins achieve significant scale
- Run risk if confidence in backing is lost
- Operational resilience of issuers and infrastructure
- Financial stability implications of rapid growth
Regulatory Principles
- "Same risk, same regulation" approach
- Risk-proportionate requirements based on scale
- Clear accountability for stablecoin issuers
- Consumer protection without stifling innovation
How Will Systemic Stablecoins Be Regulated?
Systemic Designation Criteria
- Scale of usage for payments
- Interconnectedness with financial system
- Substitutability—lack of alternatives
- Complexity of structure and operations
Bank of England Oversight
- Direct regulation of systemic payment stablecoins
- Reserve requirements and backing standards
- Operational resilience requirements
- Recovery and resolution planning
Supervisory Expectations
- Robust governance and risk management
- Segregation and protection of reserves
- Timely and reliable redemption mechanisms
- Transparent disclosure and reporting
How Do Stablecoins Relate to the Digital Pound?
Complementary Roles
- Digital pound as public sector innovation
- Stablecoins as private sector innovation
- Both can coexist serving different needs
- Competition and choice benefits consumers
Design Considerations
- Interoperability between digital pound and stablecoins
- Role of commercial banks in distribution
- Privacy and data protection requirements
- Impact on monetary policy transmission
Timeline
- Digital pound still in design phase
- Decision on proceeding not yet made
- Stablecoin regulation advancing independently
- Both tracks informing broader digital money strategy
What Should Financial Institutions Take Away?
Regulatory Direction
- Bank of England committed to enabling innovation
- Clear regulatory framework being developed
- Systemic stablecoins will face significant oversight
- Non-systemic stablecoins under FCA regulation
Strategic Implications
- UK market open to compliant stablecoin activity
- Early engagement with regulators beneficial
- Integration with traditional payment systems valued
- Institutional-grade governance expected
Operational Focus
- Reserve management to bank-like standards
- Operational resilience paramount
- Clear redemption mechanisms essential
- Transparency in disclosure and reporting
The Coinbax Perspective
This speech provides valuable insight into the Bank of England's thinking on digital money. The tone is notably constructive—the Bank sees potential in tokenisation and stablecoins while maintaining focus on stability and consumer protection.
The "same risk, same regulation" principle signals that stablecoins achieving systemic importance will face bank-like oversight. This is significant: it means institutional stablecoin issuers need to build governance, risk management, and operational capabilities comparable to traditional financial institutions.
For banks and credit unions considering stablecoin activity in the UK, this speech suggests a regulatory environment that values credible, well-governed entrants. The opportunity is real, but so are the standards.
Frequently Asked Questions
What makes a stablecoin "systemic" under UK rules?
The Bank of England will assess factors including scale of usage, interconnectedness with the financial system, substitutability, and complexity. Specific thresholds are being developed through secondary legislation.
Will the Bank of England issue its own stablecoin?
No. The Bank is exploring a retail central bank digital currency (digital pound), which is conceptually different from a stablecoin. A CBDC would be a direct liability of the central bank, while stablecoins are private liabilities backed by reserves.
How does the UK approach compare to MiCA?
Both frameworks share principles around reserve backing, redemption rights, and operational resilience. However, the UK approach places greater emphasis on systemic risk and Bank of England oversight for significant stablecoins.
Can foreign stablecoins operate in the UK?
The regulatory framework will address how stablecoins issued outside the UK can be used for UK payments. Recognition arrangements and equivalence assessments are likely elements of the final framework.