What is a stablecoin?
It is a form of digital asset that you can use to make payments. You could describe it as a type of online or electronic money.
It is not like the cash you carry or what's in your bank account, and could be created, for example, by a technology company rather than by a bank.
Stablecoins are backed by a specified asset or collection of assets, which their creator uses to maintain their value – usually a country's currency, such as the American dollar. This means that whoever is issuing the coin will have the equivalent amount of dollars saved somewhere (eg a bank account) and the person who holds it has the right to swap it for that amount whenever they want.
This makes them different to cryptoassets, which do not tend to have other things backing them up and whose value is, therefore, more volatile.
Right now, stablecoins are used mainly for:
- buying or selling other cryptoassets
- making payments across a country's border
An example of a cross-border payment is when someone sends money to family or friends in another country. It means they don't have to use a bank as a 'middle man' and will not be charged for using its services.
But, because stablecoins have a steady value, people may start using them more to pay for a wider range of things.
Is Bitcoin a stablecoin?
While Bitcoin is a type of cryptoasset, it is not a stablecoin.
The value of cryptoassets tends to move up and down a lot in a short space of time. That is because they are not backed by real assets. This makes them a risky option and is one reason why they are not widely used to pay for things.
There's another big difference. Bitcoin is issued by a computer code on a network that is not controlled by any particular person or company.
On the other hand, most stablecoins are issued by a company, which aims to make sure they stay linked to something more stable in value, such as a country's currency.
How do they work?
A stablecoin typically goes through a few stages before someone can use it. Each stage may involve a different company.
First, a company issues it. For every one it issues, the firm also holds the same value in a country's currency. This is how the company links the value of its coin to that of something else.
Then it is issued to the broader public through another type of online infrastructure known as a ledger. This is basically a digital record book where you can make a note of the transactions and who owns what. You can also transfer the value of stablecoins between individuals from it.
The value of the stablecoin issued on to the ledger is linked to the stable assets that the issuer holds. This means as soon as a coin-holder wants to exchange their coins for, say, money in a bank account, they can do that easily and without losing anything.
Finally, another company provides a digital wallet, which can be used on a smartphone or other pieces of hardware and software. This is a secure place online that holds the unique digital keys (eg passwords and codes) that allow you to unlock and move your coins, which are stored on the ledger.
People can also decide to invest their stablecoins to earn interest on them. They can go on platforms called 'exchanges' (which are essentially online marketplaces) to do that.
Are there stablecoins in the UK today?
Some people in the UK use stablecoins that are linked to the American dollar or other currencies. At the moment, a small number of them are linked to the British pound.
The Bank of England wants companies that issue stablecoins used mainly for payments to do so in a safe way.
That is why we are working with other financial regulators in the UK to propose rules on stablecoins.
Our rules would only apply to those that are widely used for payment in the UK. Right now, there are none like this.
What would the rules be?
We want people to have confidence in the different ways they pay for things. It is an important way to avoid large disruption to the UK's financial system and economy.
Our proposed rules are to regulate stablecoins that would become widely used for payments in the UK.
The regulation aims to make sure stablecoins always maintain a stable value, so people who hold them can get their money back. We also want to make sure people can pay using them without disruption. And we want to make sure that the digital wallets are safe to use and that the providers respect people's legal rights.
Is a stablecoin the same thing as a CBDC?
Will there be a CBDC in the UK?
The Bank and the Treasury have seen that the way people pay for things is changing. They are not using cash as much as they used to and digital payments are becoming more common.
For these reasons, we are looking closely at the idea of a central bank digital currency for the UK.
No decision has been made yet on whether to launch a CBDC in the UK, but we think it could be needed in the future. If we introduced one, we would call it the digital pound.
