Responses to the Bank of England’s Discussion Paper on new forms of digital money

Discussion Paper
Published on 24 March 2022

Over the past decade, there has been rapid innovation in how people make payments, and Covid-19 has accelerated these trends. The use of physical cash in payments continues to decline, and demand for convenience, especially with regard to e-commerce, has fuelled public appetite for digital payments. Financial technology firms, and in some cases big technology firms, are developing alternatives to traditional forms of money. These include ‘stablecoins’ – cryptoassets that aim to reduce volatility by pegging their value to government-sponsored – or ‘fiat’ – currencies. At the same time, central banks globally are exploring the possibility of issuing a digital form of central bank money – often referred to as Central Bank Digital Currency (CBDC).

Last year, the Bank of England (the Bank) issued a Discussion Paper on new forms of digital money. The Discussion Paper set out the Bank’s emerging thoughts on new forms of digital money, which include both systemic stablecoins and a UK CBDC. It built on the Bank’s previous Discussion Paper on CBDC published in March 2020, and the Financial Policy Committee’s expectations for systemic stablecoins set out in the December 2019 Financial Stability Report.footnote [1] This paper contains a summary of the responses to the Discussion Paper and planned next steps.

In the Financial Policy Summary and Record of its March 2022 meeting published today, the Financial Policy Committee (FPC) sets out its views on systemic stablecoins. The FPC judges that a systemic stablecoin issued by a non-bank could meet its expectations provided the Bank applies a regulatory framework that is designed to mitigate the risks to financial stability. This regulatory framework would need to mitigate the absence of a backstop that was discussed in the Discussion Paper.footnote [2] The FPC also judges that a systemic stablecoin that is backed by a deposit with a commercial bank would introduce undesirable financial stability risks.

In addition to its views on stablecoins, the FPC updated – in its Financial Stability in Focus report published alongside this paper – its system-wide assessment of the role that cryptoassets and associated markets currently play in the UK and globally. Cryptoasset technology is creating new financial assets, and new means of intermediation. The technology underpinning this innovation could bring a number of benefits including lower transaction costs, higher payment system interoperability and more choice for users. Those benefits can only be realised and innovation be sustainable if it is undertaken safely and accompanied by effective public policy frameworks that mitigate risks and maintain broader trust and integrity in the financial system.

The PRA is also publishing a Dear CEO letter reminding firms of their obligations with respect to cryptoasset exposures. And the FCA is publishing a statement reminding firms of their obligations when interacting with, or exposed to, cryptoassets.

Executive summary

The Bank of England’s mission is to promote the good of the people of the United Kingdom by maintaining monetary and financial stability. One key way we fulfil this is to make sure people have confidence in the money they use, both as a store of value and to make payments. We do this by issuing money in the form of banknotes and central bank reserves. And we ensure the safety of the other main form of money used in any modern economy – bank deposits held by households and businesses, also known as ‘commercial bank money’. But declining transactional use of banknotes and increasing use of privately issued forms of money means that the payments landscape is changing. In light of these developments, the Bank of England sought views on its emerging thoughts on new forms of digital money.

New forms of digital money, either publicly or privately provided, would be the latest innovation in an evolving landscape for the way in which payments are made in the economy. They could contribute to faster, cheaper, and more efficient payments. And they could potentially enhance financial inclusion. But they could also introduce risk.

On 7 June 2021, the Bank issued a Discussion Paper on new forms of digital money. The Discussion Paper considered how new forms of digital money could affect the financial system and macro economy. It examined the potential monetary policy and financial stability implications of new forms of digital money, including a Central Bank Digital Currency (CBDC) and systemic stablecoins – stablecoins issued by private companies and which have potential to scale rapidly and be widely used for payments in the UK. The paper also set out the key features that systemic stablecoins would need to have for the Bank to be comfortable for them to operate. Finally, the paper outlined four possible regulatory models to achieve this.

The Bank received a large number of responses and is grateful for the quality of engagement from the individuals and organisations who shared their views. Respondents to the Discussion Paper agreed that digital money would provide benefits but noted that any publicly provided digital money should not replace cash. The Bank further recognises that cash builds confidence by giving people a long-established way to hold their money in physical form. In doing so, it provides underpinning for the uniformity and substitutability of different forms of money. Importantly, this uniformity of money is experienced every day by the public, building their trust and understanding in the system. To ensure the financial stability benefits of having a widely accessible and reliable form of money originating from the central bank and a liability of it – central bank money – the Bank and other UK authorities remains committed to the ongoing provision of cash.

The Discussion Paper noted that new forms of digital money raise fundamental questions across a range of public policy objectives such as direct access to central bank money for the general public, whether a CBDC should offer data protection and privacy, and what steps could be taken and by whom, to help promote interoperability between new forms of digital money and other payment systems. The majority of respondents said that it was very important for the general public to have direct access to central bank money. Respondents agreed that any private sector firm issuing or intermediating payments in new forms of digital money would need to be fully compliant with the regulatory frameworks on data protection. Respondents also noted that interoperabilityfootnote [3] between all forms of money, including new forms of digital money, was essential for an effective and competitive payments ecosystem.

The Discussion Paper set out an illustrative scenario which demonstrated how the banking system may need to adjust in the face of the introduction of a new form of digital money and the associated reduction in bank deposits. Most of the respondents broadly agreed with the implications of the illustrative scenario. Some respondents noted that the illustrative scenario provides a useful discussion aid and is a constructive way to understand the impact of new forms of digital money on the economy. Some of the key risks highlighted by respondents include financial instability, tightening of liquidity conditions and credit contraction due to an outflow of bank deposits into new forms of digital money (especially CBDC).footnote [4] The Discussion Paper noted that large and medium UK corporates could shift to non-bank financing sources. Some respondents (especially banks) were uncertain about the funding that may be available through non-bank sources. Some respondents noted that market-based financing may not fully substitute for commercial banks. There is mixed reaction on the ability of market-based finance to support innovation and SMEs.

The Discussion Paper set out a range of possible regulatory models for systemic stablecoins, intended to achieve outcomes that meet the FPC’s expectations for systemic payment stablecoins first set out in December 2019. The first expectation addresses the financial stability risks associated with the payment functionality of stablecoins. The second FPC expectation relates to the use of stablecoins as money-like instruments. As noted in the Discussion Paper, any regulatory model will need to address payments-related, money-creation and money storage risks of stablecoins. Given commercial bank money is the primary form of private money, a natural starting point for designing regulation is the risks addressed by the current banking regime and its main features. Four key components of the banking regime would need to be reflected in the regulatory model for systemic stablecoins, these are (i) capital requirements; (ii) liquidity requirements; (iii) a legal claim; and (iv) a backstop to protect coinholders.footnote [5] However, while the banking regime provides a starting point, given the different business models of stablecoins it may not be possible simply to apply existing rules. The key is to ensure the same risks are guarded against to the same extent. Respondents agreed that some aspects of the banking regime could be reflected in stablecoin regulation. Some respondents noted that equivalent, not identical rules, could be used to meet the principle of ‘same risk, same regulation’. Overall, respondents said regulation should be clear, proportionate, and risk-based.

The Discussion Paper set out four stylised regulatory models for systemic stablecoins: (i) the bank model – stablecoin issuer to be subject to the current banking regime; (ii) the High Quality Liquid Asset (HQLA) model – a model that restricts stablecoins to holding only liquid assets; (iii) the central bank liability (CBL) model – a model in which liabilities are backed by central bank reserves; and (iv) the deposit-backed model – a model in which liabilities are backed by commercial bank deposits. Just under half of the respondents agreed with the Bank's assessment of the four stylised regulatory models. Less than 20% of respondents disagreed while the rest were neutral. Those that disagreed, did so for a wide variety of reasons. Some respondents did not see a need for any regulation of stablecoins, while some did not see a need for stablecoins, preferring to use cash instead. Some respondents also felt that the four models presented by the Bank may be too limiting.

Under the illustrative scenario, the overall impact on lending rates and credit provision is relatively modest. However, there is significant uncertainty. Because of this uncertainty, the Discussion Paper noted the potential need for the use of limits to manage any transition from commercial bank deposits to new forms of money (CBDC and/or systemic stablecoins). Most of the organisations (especially banks) supported the use of temporary limits to manage any transition.

The feedback received will serve as an important input to the Bank’s ongoing work on the topics explored in the Discussion Paper. This paper presents a summary of the responses and planned next steps.

Introduction

There are two forms of money in the economy. Central bank money is a liability of the central bank. It is available to the public in the form of cash. It is also available to commercial banks in the form of central bank reserves. Private money mainly takes the form of deposits in commercial banks – that is, claims on commercial banks held by the public. This ‘commercial bank money’ is created when commercial banks make loans to households and companies – referred to as the ‘real economy’.

Money has three main functions – it acts as a unit of account, a means of payment and a store of value. Central bank money establishes and maintains sterling as the unit of account for virtually all transactions in the UK economy and, in doing so, anchors the monetary system. Commercial bank money is widely used as both a means of payment and a store of value. But use of commercial bank money, in turn, relies on both its relative efficiency and public confidence that it can be exchanged for central bank money in the form of cash.

New forms of digital money would be the latest innovation in an evolving landscape for the way in which payments are made in the economy. But rather than use commercial bank money as the basis for transactions, providers of new forms of digital payment services would create and use their own money or ‘coin’. And these could be issued by companies, including large technology platforms, with the capacity to scale up and grow rapidly.

Like existing forms of money, new forms of digital money that are systemic could be publicly or privately provided. As noted in the Discussion Paper, the term ‘systemic stablecoin’ – often referenced as ‘stablecoin’ for simplicity – is used to refer to those that are issued by private companies and have the clear potential to scale up and grow rapidly, and to become widely used as a trusted form of sterling-denominated retail payments. A central bank digital currency – or CBDC – meanwhile, would be a digital form of central bank money provided for retail use.

New forms of digital money could be preferred by the public to commercial bank deposits, but they will be suitable only if they can be trusted as implicitly as central or commercial bank money and become an accepted means of payment. This means that stablecoins must promise, credibly and consistently, to maintain their value and to be fully interchangeable with existing forms of money at par. In other words, they must be anchored. This is essential for ensuring that users have the same confidence in stablecoins as commercial bank money.

The Discussion Paper set out the Bank’s emerging thoughts on how new forms of digital money might affect the financial system and the economy. It invited comments on the key topics explored in the paper around:

  • how new forms of digital money might impact on the role of money in the economy;
  • the public policy questions that these new forms of money raise around access, protection, privacy and the ability of users to switch with ease between different forms of money;
  • an illustrative scenario which modelled the impact which a potential demand for new forms of money might have on commercial banks’ ability to lend to businesses and people;
  • the potential impact on macroeconomic stability which a shift to new forms of digital money could bring about; and
  • considerations for creating a regulatory environment for systemic stablecoins including the possible need for limits on these new forms of digital money.

The Discussion Paper built on the Bank’s previous Discussion Paper on CBDC published in March 2020,footnote [6] and the Financial Policy Committee’s expectations for stablecoins set out in the December 2019 Financial Stability Report.footnote [7] It also referred to HM Treasury’s consultation on the UK regulatory approach to cryptoassets and stablecoins where HMT proposed to bring systemic stablecoins into the Bank’s regulatory remit, in line with its responsibilities for systemic payments systems under Part 5 of the Banking Act 2009.

Next Steps

While the Bank of England has not yet made a decision on any of the topics in the Discussion Paper, the feedback we received has shown strong support for the Bank to continue with its work on these topics. That said, respondents were clear about three things: access to cash should be preserved; the Bank should continue to engage with stakeholders including the wider public; and any regulation for systemic stablecoins should be clear, proportionate, and risk-based.

CBDC

The Bank has set up the CBDC Engagement and Technology forums, where relevant stakeholders from industry, civil society and academia provide strategic and technical input to the work on CBDC. The Bank and HM Treasury have also initiated the joint CBDC Taskforce to coordinate the exploration of a potential UK CBDC.

In 2022, the Bank and HMT will launch a consultation which will set out their assessment of the case for a UK CBDC, including the merits of further work to develop an operational and technology model for a UK CBDC. The 2022 consultation will inform a decision on whether the authorities are content to move into a ‘development’ phase which would span several years. A technical specification would follow the consultation explaining the proposed conceptual architecture for any CBDC. This could involve in-depth testing of the optimal design for, and feasibility of, a UK CBDC.

If the results of a ‘development’ phase conclude that the case for CBDC is made, and that it is operationally and technologically robust, then the earliest date for launch of a UK CBDC would be in the second half of the 2020s.

Stablecoins

The Financial Stability in Focus report (FSiF) published today sets out the FPC’s assessment of the role that cryptoassets including stablecoins and associated markets currently play in the UK and globally, and how this could develop as these markets continue to evolve. The FSiF includes regulatory considerations for systemic stablecoins.

HMT propose to bring systemic stablecoins into the Bank’s regulatory remit, in line with its responsibilities for systemic payments systems under the Banking Act 2009. This is outlined in HMT’s recent consultation on the UK regulatory approach to cryptoassets and stablecoins.footnote [8] In the summary and record of the Financial Policy Committee also published today, the FPC noted HMT’s proposal for a regulatory regime for stablecoins, including bringing systemic stablecoins into the Bank’s regulatory remit. The proposal, which would require legislation, would allow for a non-bank regulatory regime for stablecoins, but would not at this stage include a resolution regime or a deposit guarantee scheme. Systemic (non-bank) stablecoins that failed would instead be subject to a modified insolvency regime.

The FPC judges that a systemic stablecoin issued by a non-bank could meet its expectations provided the Bank applies a regulatory framework that was designed to mitigate the risks to financial stability. This regulatory framework would need to mitigate the absence of certain backstops that were discussed in the Discussion Paper.footnote [9]

As noted in the FSiF, in the absence of a resolution regime and a deposit guarantee scheme, regulatory safeguards are needed to ensure that coinholders’ funds can be returned in full if the stablecoin issuer, or another significant part of the stablecoin arrangement (eg wallets or custodians of backing assets), fails. Systemic stablecoin issuance would likely need to be fully backed with high quality and liquid assets. If those backing assets have liquidity risk, the Bank would need to consider giving systemic stablecoins access to central bank lending facilities to address the risk of market-wide events which are beyond the private sector’s capacity to self-insure. Capital requirements may also be needed to account for market risk.

To mitigate operational risk, the backing assets would need to be held in such a way as to protect them fully from the failure of the issuer or other significant parts of the stablecoin arrangement (eg wallets or custodians of backing assets).

Arrangements would be needed to ensure the funds can be returned rapidly and fully to coinholders, including preserving records of coin ownership and holding a reserve to cover the anticipated costs of distributing the funds. Supervisors would need to be able to verify that the coins are fully backed at all times, including preventing any unbacked issuance. Regulation would also need to ensure that there is a robust legal claim on the issuer or the underlying assets.

In relation to one of the illustrative regulatory models for systemic stablecoins covered in the Discussion Paper – the deposit-backed model – the FPC judged that a systemic stablecoin that is backed by a deposit with a commercial bank would introduce undesirable financial stability risks.

The Bank and other UK authorities have been actively engaging with HMT on the future regulatory landscape, including through HMT’s recent consultation on the UK regulatory approach to cryptoassets and stablecoins. In line with this work, the PRA has also published a Dear CEO letter reminding firms of their obligations with respect to cryptoasset exposures, and the FCA has published a statement reminding firms of their obligations when interacting with, or exposed to, cryptoassets.

Further work is needed to assess the broader implications of stablecoin regulatory models, including for the Bank’s own balance sheet and for monetary stability. The Bank also plans to continue its work on how to deal with the failure of systemic stablecoin entities. As noted in the Discussion Paper, the regulatory framework that will apply to systemic stablecoins will be the subject of a future Bank consultation, pending HMT’s legislative process.

The Bank continues to take a leading role in various initiatives happening at international level and seeks to promote an internationally coherent approach necessary to ensure comprehensive and consistent standards as far as possible. This is important not least because systemic stablecoins may be used to transact across borders. For instance, in October 2021, CPMI-IOSCO issued guidance for public consultation on how the international Principles for Financial Market Infrastructures (PFMIs) apply to systemically important stablecoin arrangements used for payments. The final guidance will help to support the regulation and supervision of stablecoin operators in the future.

The Financial Stability Board also published high-level recommendations for stablecoins regulation. These principles represent a common platform for an agreed international approach and will help avoid divergence in the regulatory approaches of different jurisdictions. The FSB is working in close coordination with standard-setting bodies, to identify and address any potential gaps or overlaps in relevant standards and its recommendations to prevent regulatory arbitrage and market fragmentation.

Overview of respondents

The Bank received a total of 2,539 responses from individuals and organisations. 2,456 of the responses, representing 97% of the total responses, were from individuals, and 83 responses, representing 3% of the total responses were from organisations.

Among the respondents that identified as individuals were academics and think-tanks (3.3%), Civil Society and Consumer groups (4%), Financial Services (2%), Consultants (1.3%), Fintech, Payments, and Technology (3.1%), and Trade Body (0.7%). A majority of respondents (86%) identified themselves as ‘personal application’, ‘Other’ or did not select any category. Chart 1 shows a breakdown of individual responses.

Chart 1: Split of individual responses by sector

Each of the individuals that responded to the Discussion Paper chose a category to identify with. 86% identified as either personal application, or other, or did not select a category. 3.3% identified as academics and think-tanks. 4% as civil society and consumer groups. 2% as financial services. 1.3% as consultants, 3.1% as fintech, payments, and technology, 0.7% as trade body.

Footnotes

  • Source: Bank of England.

Of the organisations that responded, the Financial Services sector was most represented followed by respondents which selected ‘Other’, the Technology sector, Fintech, Payments, Trade Body, Consultancy, Civil Society, Consumer Group, Think tank, Personal application, and academic. See Chart 2 for a breakdown of organisation responses by sector.

Chart 2: Split of organisation responses by sector

Each of the organisations that responded to the Discussion Paper chose a category to identify with. 24% identified as financial services, 22% as other, 11% as Technology. 10% as Fintech, 7% identified as consultancy, 7% as trade body, 6% identified as payments, 5% identified as civil society, 2% identified as consumer group, 2% identified as personal application, 2% identified as think tank.

Footnotes

  • Source: Bank of England.

There was a degree of alignment in some of the responses submitted by individuals to some questions. These may partly reflect a coordinated campaign by the Positive Money group. We have highlighted our observation on these responses in the summaries of the particular questions where the issue arises. Nevertheless the Bank notes, and welcomes, the strength of engagement on this topic by those interested in issues relating to the future of money.

Our approach to reviewing responses

The Discussion Paper invited feedback from readers on 15 questionsfootnote [10]. These questions were structured around the five chapters of the paper (the role of money in the economy, public policy objectives, an illustrative scenario, implications for macroeconomic stability, and the regulatory environment).

The questions comprised four multi-choice questions and seven open-ended questions. The response rate for each question varied (Chart 3), with a large number of individuals returning blank responses to the questions that were further down the questionnaire.

Most of the staff analysis focused on identifying themes from the open-ended questions. The remainder of this paper provides a summary of the analysis of responses to each chapter of the Discussion Paper.

Chart 3: Response rates, percentage of category total

For all questions, response rates from organisations were between 46% to 93%, while for individuals response rates were between 8% and 99%. The response rate to Q6 was the highest for both organisations and individuals.

Footnotes

  • Source: Bank of England.

The role of money in the economy

The Discussion Paper noted the potential for new forms of digital money to improve the range of transaction services available to people and as a result, could be preferred to commercial bank deposits. At scale, this substitution from bank deposits to new forms of digital money might reduce the efficiency of credit provision in the economy as a large-scale displacement of commercial bank money could mean a higher fraction of deposits backed by high-quality liquid assets (HQLA) rather than by loans to the real economy. It might also lead to greater reliance on non-banks for credit provision. The Discussion Paper invited responses from the public on how new forms of digital money might affect money and credit creation and whether there were any channels beyond those explored in the paper.

Around half of all respondents were broadly supportive of new forms of digital money, seeing opportunity in financial innovation and less reliance on traditional forms of banking and finance.

Around half of all respondents were broadly supportive of new forms of digital money, stating that new forms of digital money might offer benefits such as providing more accessible, flexible and cheaper ways to make payments, as well as overall improvements in payment efficiency (including the ability to make micropayments). Some respondents cited existing fintech-led improvements to credit provision, noting that a digital currency would encourage more innovation in this area. Of the remaining responses, sentiment was split between being more neutral or negative, with concerns focused on the stability of the banking sector and a strong desire to keep cash.

Overall there was strong support for a CBDC. Respondents felt that money is a public good and should always remain so. Individual respondents felt that traditional commercial banks do not focus enough on their customers’ best interests and so would welcome an alternative means to manage their money. Some respondents also felt that a public system would be fairer and more inclusive.

Other respondents noted that the emergence of digital money was a natural step in the ongoing digital revolution, and that by not implementing a form of Sterling digital money the UK could be left behind in the development of financial technology, raising the risk that individuals and businesses look outside the UK for digital finance solutions.

However, respondents noted some risks that new forms of digital money could pose.

Some respondents presented a range of concerns around new forms of digital money:

  • Deposit flight: Some respondents, particularly those from the financial services organisations noted the risk of deposit flight from commercial banks, which was expected to negatively impact the availability and cost of credit. It was suggested that the effects could be more significant than those illustrated in the Discussion Paper. Some respondents noted that with no precedent to compare this with, it was almost impossible to accurately assess the risk. Ultimately though, the impact is expected to be determined by the overall CBDC design and regulation framework. To help provide clarity here, the Bank is undertaking extensive analysis of the various design choices for a digital currency, assessing the impacts, advantages and likely demand of each.
  • SME lending: SME lending was highlighted as a particular risk, as this sector already faces financing difficulties. However, many respondents pointed to fintech, with the broader progress in financial innovation that a digital currency could bring, and also non-bank lending as potential mitigants to this risk. The Bank actively monitors the potential opportunities, risks and implications of financial innovation and will continue to do so.
  • Access to cash: Overall there was a strong sense that a digital currency should not replace cash given its continued use in many businesses. It was highlighted that not everyone has access to the technology or the technological know-how to use a digital currency, and that any digital system is significantly more vulnerable to fraud/online hacking compared with physical cash. Furthermore, many individual respondents asked how people would make ad hoc payments to charity or pay children pocket money without access to cash. As noted in the Discussion Paper, the Bank and other UK authorities remain committed to the provision of physical cash. The Bank welcomes the introduction of the Financial Services Act 2021 which was designed to facilitate wide-spread access to cash-back without a purchase.footnote [11]

Bank of England’s comments

The Bank of England understands the public’s concern regarding the ongoing provision of cash. As noted in the Discussion Paper, the Bank and other UK authorities remain committed to the provision of physical cash. The Bank therefore welcomes the introduction of the Financial Services Act 2021 which was designed to facilitate wide-spread access to cash-back without a purchase. Furthermore, the Bank is also aware of the importance of the design of any potential digital money, and is undertaking extensive analysis to assess the various design options and their implications for the financial system.

Public policy objectives

New forms of digital money raise fundamental questions across a range of public policy objectives such as access, financial inclusion, protection, privacy and the ability of users to switch between different forms of money.

On the importance of access to central bank money, the Discussion Paper stated that the Bank recognises the importance of central bank money not only for those who want to use it, but also for its unique role in anchoring value and promoting confidence in the monetary system. The Discussion Paper further emphasised that, in the form of cash, central bank money is the only risk-free form of money available to households and non-financial businesses. A CBDC could play an important role in sustaining, and potentially expanding, retail access to central bank money.

On privacy aspects, the Discussion Paper noted that the Bank does consider the value in ensuring access to money that offers data protection and privacy and that promotes, rather than hinders, financial inclusion. As such, any private sector firm issuing or intermediating payments in new forms of digital money would need to be fully compliant with current UK data protection laws. Subject to meeting these regulations, design choices around privacy would need to be made relating to the data that each entity in a stablecoin or CBDC payment system accesses, holds and processes, and for what purpose. The Discussion Paper also emphasised that data protection and AML regulatory frameworks are outside the Bank’s remit, but the Bank will continue to engage with HM Government on data and privacy aspects of digital money.

On interoperability, the Discussion Paper stated that the Bank recognises the importance of interoperability between services, but is otherwise technology neutral subject to meeting its objectives. The Discussion Paper highlighted that for systemic stablecoins, some degree of interoperability is essential. This is because they will need to meet the FPC’s stablecoin expectations. And this means users must be allowed to exchange their coins into existing forms of money. At a minimum, therefore, stablecoins will need to interoperate with the banking system.

The questions for discussion in this chapter of the Discussion Paper asked respondents how important it is for the general public to have direct access to central bank digital money, whether a CBDC should offer data protection and privacy and what could constitute a minimum set of protections, and what steps could be taken and by whom, to help promote interoperability between new forms of digital money and other payment systems.

Respondents noted access to central bank money is very important. The safety and security offered by central bank money cannot be fully replicated by private sector alternatives.

A majority of respondents stated that it was ‘very important’ for the general public to have direct access to central bank money (e.g. cash, CBDC). Respondents noted that access to central bank money is of fundamental importance to maintaining trust within the UK’s monetary system. The benefits cited by respondents include: reducing reliance on banks; mitigating the concerns about the centralised control of money from the private sector; and the danger of monopolies from private dominant forms of money.

A major recurring theme from respondents, largely individuals, was the need to maintain the availability of and access to cash. These respondents explained that physical cash provides safety, security and anonymity which a digital currency may not be able to offer (as it could be vulnerable to technical issues/digital manipulation). In addition, the tangible and physical nature of cash instils confidence and creates the perception of holding value outside the control of commercial businesses.

Respondents also raised concerns about how private digital forms of money could lead to exclusion of more vulnerable segments of society, namely those who are not digitally adept or lack access to the digital services or the internet. As such, the public offering of CBDC should seek to be designed in such a way to mitigate financial exclusion risks in a future digital world. Many respondents supported the need for an accessible and inclusive CBDC that could be accessed through a trusted public organisation. However, some respondents opposed the need for a CBDC altogether stating access to cash was sufficient.

Respondents asked for public education on digital money and what it might mean for the public.

Respondents suggested that many people are not aware of what digital money actually is, or what it might mean for them and for their businesses, and that the Bank could do more to engage with a wider audience to ensure the public are kept well informed of any potential changes to the way they access their money.

The majority of individuals and organisations agreed with the Bank’s view on protection and privacy, where any private sector firm issuing or intermediating payments in new forms of digital money would need to be fully compliant with current UK data protection law.

The majority of organisations and just over half of all individuals ‘agreed’ or ‘strongly agreed’ that digital money should offer data protection and privacy.footnote [12] A handful of individuals stated that the privacy properties of cash should also translate to CBDC and other new forms of digital money, where there was complete anonymity and non-traceability of transactions. While the majority of organisations and some individuals stated that digital money should include privacy and protection in digital money designs to coexist with, and support the wider legal and regulatory frameworks for the financial system such as rules for anti-money laundering (AML), counter-terrorism financing (CTF) and general data protection regulation (GDPR).

Some individuals raised queries about the role of data in any CBDC system, however, the majority of respondents stated that they trusted the Bank in protecting their privacy relative to commercial bodies.

The respondents that ‘disagreed’ with the Bank expressed concerns around commercialisation and use of data, however, they did accept that some data collection may be necessary for purely operational purposes. Conversely, some respondents suggested that the commercialisation of data could potentially become a core part of a payment provider’s funding model. These respondents further suggested that the collection and utilisation of data could enable payment providers to better meet their customers’ needs.

Respondents found interoperability between all forms of money, including new forms of digital money, as essential for an effective and competitive payments ecosystem. In addition, it would support competition and innovation in a way that benefits consumers through better value-add services.

Respondents reasoned that interoperability mitigates fragmentation risks associated with closed-loop systems and ensures that the exchangeability of money happens with minimal friction and cost. Some respondents further suggested that stablecoins, digitalised deposits and CBDC should be integrated with existing banking infrastructure, various mobile wallet providers, point of sales and automated teller machines, permitting consumers to utilise new forms of digital money in broadest possible set of circumstances. Additionally, respondents find greater cross-border interoperability to be a desirable feature for any new forms of digital money.

According to respondents, consistency of design in different forms of digital money could result in greater benefits being passed on to consumers. Respondents explained that this is because commonality and homogeneity of digital currency offerings drive down costs, such that payments providers would seek to gain competitive advantages through more unique value-add services brought through by innovation.

Fraud risks were an important consideration put forward by individuals. The ability to monitor cash out, transfer, use and exchange between different forms of money or private currencies provided by a variety of small or large digital money providers would be key to mitigating risks. One suggestion made was to review current control mechanisms, such as strong customer authentication with analysis of any areas of weakness within or between systems. Respondents also emphasised these risks were exacerbated if any new form of digital money was integrated with the unregulated cryptoassets market. Respondents thought that it would also be crucial for consumers to understand the differences between regulated and unregulated money and assets, preventing them from taking greater risks than they are prepared for. Respondents also flagged that there was a risk of legitimising the widespread use and acceptance of unregulated cryptoassets.

Suggestions to improve interoperability included the adoption of standards for data, technology, regulation and access arrangements that could support the seamless exchange of information. This could be achieved through wider adoption of standardised application programming interfaces (APIs), wider use of the ISO20022 messaging standard, or the establishment of new standards jointly determined by the Bank and the private sector.

Bank of England’s comments

On access to central bank money, the Bank notes that central bank money establishes and maintains sterling as the unit of account for virtually all transactions in the UK economy and, in doing so, anchors the monetary system. More specifically, at the retail level, the availability of risk-free central bank money is likely to promote trust in other, private forms of money, such as commercial bank deposits. It acts as a mechanism between different types of privately issued money.footnote [13] As noted above, the Bank remains committed to the ongoing provision of cash.footnote [14]

On privacy, the Bank recognises there may different purposes for commercial entities involved in the provision of CBDC and stablecoins to hold and process data. These purposes include: on-boarding end-users, processing transactions, and compliance with regulations against illicit finance, such as anti-money laundering (AML) and counter-terrorist financing (CTF) rules. However, data protection and AML regulatory frameworks are outside the Bank’s regulatory remit. Policy choices around these issues are likely to have significant societal, as well as technical, implications. In considering them, the Bank is working closely with HM Government, other authorities, including the Information Commissioner’s Office, and broader society, to identify ways to better inform end-users in relation to the new services and risks associated with them.

Finally, the Bank recognises the importance of coexistence between current and new forms of money and the need for competition in its provision. A non-competitive outcome could diminish rather than enhance people’s welfare. It could stifle innovations that would otherwise improve services and reduce costs for users. And it could risk financial stability if firms became so important that they are ‘too-big-to-fail’. The Bank does not have a direct remit to promote competition in payments, although it does have a secondary competition objective for PRA regulated firms. Given that potential market structures could impact financial stability, it will therefore be important for the Bank to engage with other public authorities to consider any potential competition issues in relation to new forms of digital money. These authorities include the Competition and Markets Authority, Financial Conduct Authority and the Payments Systems Regulator.

One requirement for coexistence between different forms of money is interoperability. The specific models for interoperability, the technology and access arrangements are yet to be defined by the Bank. However, the Bank is engaging with industry stakeholders on these topics in both the Technology and Engagement forums, and plans to outline more detailed findings in the CBDC consultation paper.

An illustrative scenario

The illustrative scenario modelled the potential demand for new forms of digital money, its impact on banks' balance sheets and, therefore, on credit conditions. Under the illustrative scenario, around a fifth of household and non-financial corporate deposits transfer to new forms of digital money owing to non-financial factors. This would impact banks’ liquidity ratios.

Banks are assumed to restore their liquidity positions (high quality liquid assets – HQLA and central bank reserves) and hence their ability to continue lending, by issuing long-term wholesale debt. The precise changes in banks’ balance sheets will depend on the asset backing model (Central Bank reserves, HQLA or Deposit backed (DB)) a digital money uses to back its deposits as this determines how the lost deposits return to the banking system. In each case, it is assumed that either banks or digital money issuers would buy gilts and commercial banks would increase their issuance of long term wholesale funding, which is financed by the non-bank sellers of the gilts.

Replacing lost deposits with more long-term wholesale funding implies an increase in banks’ overall funding costs, which could in turn increase rates on new bank lending by around 20 basis points. This could increase the scope for non-banks to compete in lending to both households and companies through a combination of bond markets, asset-based finance, non-bank loans and peer-to-peer lenders.

Overall, under the illustrative scenario, the impact on lending rates and credit provision is modest. Credit provision to the wider economy falls by a little over 1%. However, there is significant uncertainty around the illustrative scenario.

The Bank sought views on whether the illustrative scenario had the right components and responses with which to assess the impact of demand for new forms of digital money on the macro-economy.

Most of the respondents broadly agreed with the implications of the illustrative scenario. Some respondents noted that the illustrative scenario provides a useful discussion aid and is a constructive way to understand the impact of new forms of digital money on the economy.

A majority of the respondents agreed that the illustrative scenario had the right components to assess the impact of new forms of digital money on macroeconomy. Respondents who disagreed noted the need for a more in-depth and detailed analysis of other possible scenarios.

Overall, there were mixed views on the impact of new forms of digital money. Some respondents, primarily those from the banking sector believed that the impact on credit conditions owing to digital money, especially CBDC, could be larger than suggested by the scenario. Respondents from the fintech and consultancy sectors, thought the impact would be modest without a disruptive effect on the banking system.

Bank of England’s comments

The Bank thanks respondents for sharing their views on the illustrative scenario outlined in this paper. The feedback provided will help to shape our analysis of the potential impact of new forms of digital money on banks’ balance sheets and credit conditions.

Implications for macroeconomic stability

Using the illustrative scenario, the Discussion Paper explored the potential macroeconomic implications including for the banking sector’s liquidity resilience, credit creation, money market functioning, and the implementation and transmission of monetary policy.

The Discussion Paper examined five issues around macroeconomic stability in relation to new forms of digital money: (i) confidence in money and payments; (ii) banking sector liquidity resilience; (iii) credit conditions; (iv) money market functioning; and (v) implementation and transmission of monetary policy. In each case, the potential opportunities for enhancing monetary and financial stability are considered alongside the potential risks as well as potential risk mitigating measures.

Respondents were asked whether they (i) could identify any other significant risks to economic stability from new forms of digital money even when stablecoins are adequately regulated, (ii) could see any other impediments to, or benefits from, a shift to market-based financing in the event of a tightening in bank credit conditions, and (iii) have any other concerns over the ability of banks and markets to adjust to the introduction of new forms of digital money in addition to those identified.

Key risks highlighted by the respondents include financial instability, tightening of liquidity conditions and credit contraction due to outflow of banks deposits into new forms of digital money (especially CBDC).footnote [15] Most of these risks have been considered in the illustrative scenario

Some of the key risks highlighted by respondents include deposits flowing out of commercial banks, reduction in the overall stickiness/stability of bank deposits during stress, uncertainty over how CBDC would replace the role of deposits in credit creation, and contraction in credit and/or an increase in the cost of credit. Respondents also noted that replacing deposits with increased wholesale funding (especially short term) as a substitute to deposits could expose banks to more liquidity risk and reduce the Net Stable Funding Ratio, potentially leading to credit rating downgrades and increasing the funding cost for banks. Respondents also noted that there might be a different impact on banks depending on business models, where institutions that depend more on retail deposits could be affected more than others.

Some respondents noted that if backed by gilts, CBDC issuance has some resemblance to asset purchases for monetary policy.footnote [16] Depending on retail demand, CBDC might also make the Bank’s balance sheet more volatile in size.

Respondents also raised the potential impact on payment volumes and revenues for existing payment systems.

Respondents did suggest some mitigation measures that the Bank could take in order to address a tightening of liquidity conditions and contraction of credit provision. Some specific proposals included (a) redistribution of liquidity through Bank facilities and complemented by a special purpose vehicle (SPV) structure – this could entail commercial banks using short-term central bank operations to fund loans temporarily before selling them to a (state sponsored) SPV similar to arrangements in the US, and (b) asset purchases, and (c) long term funding scheme for commercial banks.

Such measures would, of course, raise questions about the appropriate role and footprint of the central bank in financial markets, as well as whether this would increase moral hazard or other risks in the system.

Some respondents noted that market-based financing may not fully substitute for commercial banks. There is mixed reaction on the ability of market-based finance to support innovation and SMEs

Respondents from the banking sector highlighted the following risks associated with market-based financing: (a) uncertainty about non-bank credit supply offsetting any decline in commercial bank loans given information asymmetries, especially for SME lending, (b) corporate entities could compete with banks for market-based funding, pushing funding costs up further for all, (c) maturity transformation by non-banks is limited, market-based funding does not have the same ‘money multiplier’ effect as commercial banks, (d) regulation of non-bank financial sector and shift of business to shadow banking, and (e) increase in pro-cyclicality of lending.

Respondents from the banking sector similarly commented that the ability of market-based finance to fund to the ‘most innovative enterprises’ is unproven. Some respondents believe that situation could become even worse for SMEs in particular, who are not able to issue bonds or shares. Development banks could be a better alternative to market-based finance.

Some respondents who viewed market-based financing favourably, commented that market-based financing could be particularly beneficial for SMEs and innovative technologies along with new forms of digital money could facilitate this. Besides, new potential sources of financing could emerge.

There were concerns about the fragility of market-based finance, especially by individual respondents.

Bank of England’s comments

The Bank considers that most of the risks highlighted by the respondents were covered by the illustrative scenario. However, respondents did highlight some risks which did not feature in the illustrative scenario, for example the possibility of ratings downgrade and higher asset encumbrances for commercial banks in case of increased reliance of wholesale funding. The Bank will consider these risks further as we continue our analysis of the potential risks from new forms of digital money.

The regulatory environment

The Discussion Paper noted that regulation lays the groundwork for innovation and needs to be clearly established before a systemic stablecoin could safely operate in the UK. The FPC has set out expectations for the regulation of systemic stablecoins. These expectations aim to ensure the safety of stablecoins as an alternative to both existing payment systems and commercial bank money.

The FPC’s first expectation addressed the financial stability risks associated with the payment functionality of stablecoins. The expectation states that payment chains that use stablecoins should be regulated to standards equivalent to those applied to traditional payment chains. Firms in stablecoin-based systemic payment chains that are critical to their functioning should be regulated accordingly.

The second FPC expectation relates to the use of stablecoins as money-like instruments. Stablecoins used as money should meet equivalent standards as those provided by commercial bank money. To meet this second expectation, a core set of features of the current banking regime may need to be reflected in any regulatory model for stablecoins. These include legal claim, capital requirements, liquidity requirements and support, and a backstop consisting of the resolution regime and deposit guarantee scheme, which ensured that depositors were compensated up to £85,000 if a bank failed and the continuity of critical economic functions for systemic banks and financial stability was supported. The Bank invited views on whether there were any other features of the banking regime that should be reflected in the regulatory model for stablecoins.

To meet these expectations, a regulatory framework would need to be clearly established before a stablecoin could safely operate in the UK. Establishing a secure and clear regulatory environment for stablecoins to operate within the UK would also lay a clear foundation for sustainable innovation and allow consumers to safely realise the benefits they may offer.

HM Treasury propose to bring systemic stablecoins into the Bank’s regulatory remit, in line with its responsibilities for systemic payments systems under the Banking Act 2009. This is outlined in HMT’s recent consultation on the UK regulatory approach to cryptoassets and stablecoins. The legislative changes to be made by Parliament in order to implement the outcomes of this consultation are vital to ensure the Bank and other UK authorities have the necessary remit and powers to regulate fully stablecoins in line with the risks they pose. To ensure that the same risks are guarded against to the same extent, regulators would apply the principle of ‘same risk – same regulatory outcome’.

Respondents agreed that some aspects of the banking regime could be reflected in stablecoin regulation. However, equivalent, not identical rules, could be used to meet the principle of ‘same risk, same regulation’. Regulation should be clear, proportionate, and risk-based

Respondents agreed that implementing a backstop for stablecoins (consisting of a resolution regime and/or deposit guarantee) would be challenging, as noted in the Discussion Paper. Respondents did not provide alternative solutions.

The majority of respondents agreed with the principle of ‘same risk, same regulation’, noting that regulation should be clear, proportionate, and risk-based. Some respondents commented that same regulation should not be taken to mean identical rules, but rather rules that deliver equivalent outcomes. One respondent suggested that a more appropriate formulation of the regulatory principle of ‘same risk, same regulation’ could be ‘same business, same risks, equivalent rules’.

Some respondents raised concerns around fraud and accountability noting that there needs to be clarity on who would be liable when fraud occurs. The hacking of wallets or theft of private cryptographic keys were noted as examples of issues facing coinholders. Respondents wanted to know who would be liable in these circumstances.

Many respondents offered suggestions on what features of the current banking regime could apply to stablecoins. These include: Anti-Money Laundering (AML) and combatting the Financing of Terrorism (CFT) regulations, consumer protection including participation in the deposit guarantee scheme, product and resilience requirements, conduct regulation and other Know Your Customer (KYC) requirements. Also mentioned were the Senior Management and Certification regime and an account switching service similar to the Current Account Switch Service (CASS).

A number of respondents put forward thoughts on how stablecoins could be regulated. Some examples include: a suggestion that the Bank explore the concept of digitalised deposits as a new form of money, and taking a threshold regulatory approach where stricter requirements might be imposed on issuers as they gain systemic presence. Some respondents felt that the current e-money regime could be a good starting point or that the full banking regime could be applied, with exclusions made for features that would not work in a stablecoin context. Conversely, many others thought that a different regulatory regime is needed to account for the different roles and risk profiles within a stablecoin arrangement. Some of the additional thoughts provided by respondents include requiring issuers to hold reserve assets in segregated accounts at custodian institutions in a bankruptcy remote manner, and also requiring issuers whose stablecoins are pegged to a given currency to register in the country whose currency their stablecoin is pegged to. Respondents agreed that regulation should be clear, proportionate, and risk-based.

Stylised regulatory models

The bank model had the strongest support among organisations, with individuals preferring the central bank liability model.

The Discussion Paper explored four stylised regulatory models that could meet the FPC’s second expectation to provide equivalent protections to commercial bank money. These models differed as to how broad the range of backing assets could be. The bank model, in which stablecoins are tokenised deposits, allowed for the widest basket of backing assets, including loans, HQLA and central bank reserves. The HQLA model allowed for a mix of HQLA and central bank reserves. The central bank liability (CBL) and deposit-backed models would allow the narrowest range of backing assets.

Respondents were asked if they agreed with the Bank’s assessment of the four possible regulatory models and whether there were other models the Bank should consider. Just under half of respondents were supportive of the Bank’s assessment, while less than 20% disagreed – the rest were neutral (Chart 4). Organisations and individuals’ responses were broadly aligned. The results suggest that the Bank broadly identified the right backing models for systemic stablecoins that could meet the FPC’s second expectation.

Chart 4: Q17: ‘Do respondents agree with the Bank’s assessment of the four possible regulatory models for stablecoins? Are there other models the Bank should consider?’

On whether respondents agreed with the bank’s assessment of the four regulatory models for stablecoins:
16.3% (representing 7 organisations), and 7.1% (representing 40 individuals) strongly agreed. 
34.9% (15 organisations) and 40.4% (226 individuals) agreed.
30.2% (13 organisations) and 33.4% (187) individuals were neutral.
9.3% (4 organisations) and 6.8% (38 individuals disagreed)
9.3% (4 organisations) and 12.3% (69 individuals strongly disagreed).

Footnotes

  • Source: Bank of England.

Respondents were also asked to explain their reasons behind their response to Q17 and for their thoughts on the question of regulatory models more generally. It was also possible to gauge the degree of support for each of the models among organisations and individuals from their answers. Organisations expressed most support for the bank model, but this was not universal. Organisations that supported the bank model tended to be banks. Some organisations also expressed support for the other regulatory models.

The majority of individuals supported the CBL model, although their comments reflected their preference for the Bank to issue a CBDC. For clarity, the CBL model for systemic stablecoins proposed in the Discussion Paper would mean that the stablecoin was backed by a pool of funds held at the central bank, and would be a liability of the private sector issuer. In contrast, a CBDC would itself be a liability of the central bank issued to retail users, which may be made available through private sector ‘payment interface providers’. We observed that the vast majority of these individuals responded in a very similar way, using very similar language as part of their responses. A small minority of individuals expressed support for the other models.

A number of comments were relevant to all models. All models would require capital to ensure that all coinholders would be compensated in full in the event that the stablecoin issuer failed. The amount of capital required would depend on the riskiness of the underlying assets and the issuer.

Respondents thought that some models may make stablecoins less interoperable with existing money. The CBL and bank models were seen as easiest to interoperate with existing money, with the HQLA model seen by respondents as more challenging to integrate. Respondents also noted that the way in which consumers used stablecoins could be important for the choice of regulatory model. If stablecoins were used largely for transactional purposes, then the bank, deposit-backed and CBL models could be most appropriate. If stablecoins were used instead as a store of value, then the HQLA model could be preferable. This assumed that backing assets were interest-earning, with the interest being passed on to coinholders.

A number of comments relating to each of the backing models were also received. Respondents in favour of the CBL model noted its simplicity, and felt it could offer the most reliable conversion to fiat money (on account of the safety of the backing asset). Some also saw it as the most appropriate model if stablecoins were mostly used for transactional purposes alongside existing money. Other respondents saw the requirement for central bank balance sheet access as a large barrier to entry and felt that the Bank had not taken account of the risks from large and sudden fluctuations in central bank reserves.

A number of respondents noted the importance of transparency and stringency of requirements for the success of the HQLA model. Coinholders needed to know what backing assets are made up of and there should be strict rules for asset eligibility. Some respondents saw it as the most flexible model where requirements could be calibrated according to the size of the coin. One respondent thought the HQLA model was most likely to spur ingenuity among issuers and saw other models as too similar to existing commercial bank money. Some respondents felt that the HQLA model was most appropriate if consumers adopted stablecoins as a store of value. One respondent worried that the supply of stablecoins backed by HQLA could be state-dependent – high in times when HQLA was easily available and low when not. Some also thought that coins backed by HQLA would be harder to interoperate with existing money. One respondent worried about the impact of demand for HQLA from stablecoin issuers on the market for HQLA as a whole – it could make it harder for the rest of the system to find safe collateral.

Organisations expressing support for the bank model (which were mostly banks) felt that the only way to meet the FPC’s second expectation would be through banks’ involvement in the creation of traditional and digital money. Some respondents felt that banks issuing both existing and digital money could also reduce the migration of money out of the banking system. Some respondents commented that bank regulation was not only focussed on managing risk from maturity transformation, and noted the increased focus on operational resilience in bank regulation.

Other respondents did not see the involvement of banks as being essential to meeting the FPC’s expectations, instead expressing concerns about potential frictions and barriers to entry from the involvement of banks – either as issuers or intermediaries. One respondent felt that non-bank models are needed to promote innovation. Some respondents also felt that the involvement of banks created additional risks to stablecoins, which could be difficult to assess for individuals. One respondent felt that banks would have an unfair advantage if they were allowed to back stablecoins with loans. Another respondent worried about allowing large technology companies to set themselves up as banks and issue stablecoins – this could concentrate too much power in the hands of these companies and create antitrust issues.

Respondents’ comments on the deposit-backed model had similar themes to those on the bank model. Some felt that one-to-one backing with deposits would be the quickest way to establish confidence in digital money and that the deposit-backed model could reduce any perceptions that digital money is safer than traditional money. Other respondents did not see the need for the involvement of banks in digital money, noting the dependence this created between digital money and bank issuers and the frictions created by banks’ involvement. Some respondents felt that the impact on custodian banks needed to be managed, noting the potential impact of deposits on regulatory ratios.

Use of limits

As set out in the Discussion Paper, under the illustrative scenario, the overall impact on lending rates and credit provision is relatively modest. However, there is significant uncertainty. Because of this uncertainty, the Discussion Paper noted the Bank is considering the need for the use of limits to manage any transition ie possible shift from commercial bank deposits to CBDC/stablecoins. The Discussion Paper highlighted four possible ways in which limits could be structured: (i) aggregate holdings, (ii) transaction limits, (iii) access eligibility and (iv) remuneration. The Paper noted that it is also possible that such limits could be considered on a longer-term basis for new forms of digital money where risks to monetary and financial stability turn out to be greater than outlined in the Paper or where new risks emerge. Respondents were asked whether, besides the large uncertainty around a new steady state and risks identified during any transition, there were any other reasons for imposing limits and how such potential limits could be structured.

Most of the organisations (especially banks) agreed that temporary limits could be used to reduce outflows of retail deposits and to mitigate financial stability. Respondents noted that limits could potentially be relaxed over time.

Most of the organisations (especially banks) agreed that the use of temporary limits could reduce outflows of retail deposits and to mitigate financial stability risks. Of the remaining responses, sentiment was split between those disagreeing that limits should be used and those whose comments did not particularly touch on limits.

One respondent suggested that limits might be useful for creating controlled operational phases for assessing the performance and resilience of new stablecoin systems and to prevent fraud. Some respondents noted that limits could encourage the movement of funds to unregulated forms of digital currencies and urged that a cautious approach should be taken. Respondents also noted the need for limits to be applied consistently and reviewed regularly to avoid stifling competitiveness in the interests of incumbents.

A few respondents said that permanent limits on CBDC holdings might be more appropriate for addressing longer-term retail funding shortages as it would limit the size of the CBDC market, focusing on its role as a substitute for notes and coin in payments, and allowing for a more predictable market with limited scope to disintermediate the UK banking sector and cause financial instability. Respondents noted that limits should be clear for the public to understand.

A number of respondents did not agree with the use of limits. They said using limits could stifle innovation and could potentially harm consumers by preventing inclusion and fostering access restrictions. It could also lead to raised costs for consumers. There was a view that limits may have unintended consequences of their own. For example, the use of limits between a CBDC and commercial bank deposits could, in some circumstances, disrupt parity between the market valuation of public and private money.

Respondents gave the following suggestions for how the Bank might think about limits:

  • Phased regulation as an alternative to limits: some respondents were of the view that an appropriate regulatory framework with an effective set of regulatory tools might be a more suitable alternative to limits. Establishing calibrated incentive structures via regulatory requirements around liquidity at a wholesale level, or negative remuneration for consumers above thresholds could be explored. Some respondents thought that making bank deposits more attractive may be an alternative to limits.
  • Pilot testing: undertaking pilot testing to understand the impact that limits might have was suggested as a useful exercise for the Bank to undertake. Limits on aggregate holdings, transaction limits and access eligibility were identified as candidates for an initial testing. One respondent suggested limits could be programmed into distributed ledger technology platforms either through a hard wiring of rules into the system or building in a feature to cap the maximum amount token holders could hold in their wallets.
  • A data-driven approach: In designing limits, it may be helpful to look at data such as banking funding model shifts and impacts on deposits, overall size of a stablecoin or CBDC’s issuance and its liquidity and other rolling market indicators around impacts like lending rates and costs in indicative markets, segments and sectors as well as impacts to high quality liquid assets markets stemming from potential rules for stablecoins reserve.
  • Phased approach to using limits: the launch of real-time retail payment systems, (eg Faster Payments) was suggested as an example to consider as transaction limits rose from £10,000 to £250,000 over time. There were also comments on relaxing limits over time once the appropriate guard rails are in place and for temporary limits to be designed to operate similarly to the concept of ‘speed bumps’ used to slow down high frequency algorithmic trading.

Bank of England’s comments

The Bank notes the support for its analysis of the four regulatory models for stablecoins and the comments received on each of the models. All feedback will be taken into account as part of the Bank’s future decisions on digital money.

As noted in the Financial Policy summary and record, the FPC judges that a systemic stablecoin issued by a non-bank could meet its expectations provided the Bank applies a regulatory framework that was designed to mitigate the risks to financial stability. This regulatory framework would need to mitigate the absence of a backstop that was discussed in the Discussion Paper.

The FPC also judged that a systemic stablecoin that is backed by a deposit with a commercial bank would introduce undesirable financial stability risks. Further work is needed to assess the broader implications of stablecoin regulatory models, including for the Bank’s own balance sheet and for monetary stability. The Bank also plans to continue its work on how to deal with the failure of systemic stablecoin entities. As noted in the Discussion Paper, the regulatory framework that will apply to systemic stablecoins will be the subject of a future Bank consultation, pending HMT’s legislative process.

The Bank is still considering the use of limits and how such limits could be designed. The Bank agrees that limits might be a useful tool for managing financial stability risks. Limits may also be useful in creating controlled operational phases for assessing the performance and resilience of new stablecoin systems.

The Bank has not taken a decision yet on the use of limits but it considers that should limits be needed, limits would need to be applied in a coherent way across all forms of digital money.

Annex: Questions asked in the Discussion Paper on new forms of digital money

  • How might new forms of digital money affect money and credit creation? Are there channels beyond those explored in this paper?

  • How important is direct access for the general public to central bank money in a digital world?

    Explain your reasoning for your answer and your thoughts on the question more generally.

    Do you agree with the Bank’s view on protection and privacy? What would you regard as a minimum set of protections?

    Explain your reasoning for your answer and your thoughts on the question more generally.

    What steps could be taken, and by whom, to help promote interoperability of new forms of digital money with other payment systems, and thereby foster a competitive environment?

  • Does the illustrative scenario have the right components and responses with which to assess the impact of demand for new forms of digital money on the macroeconomy?

    Explain your reasoning for your answer and your thoughts on the question more generally.

  • Can respondents identify any other significant risks to economic stability from new forms of digital money even when stablecoins are adequately regulated?

    Do respondents see any other impediments to, or benefits from, a shift to market-based financing in the event of a tightening in bank credit conditions?

    Do respondents have any other concerns over the ability of banks and markets to adjust to the introduction of new forms of digital money in addition to those identified?

  • Do respondents think there are any other features of the banking regime that need to be reflected in the regulatory model for stablecoins?

    Do respondents agree with the Bank’s assessment of the four possible regulatory models for stablecoins? Are there other models the Bank should consider?

    Explain your reasoning for your answer and your thoughts on the question more generally.

    Given the large uncertainty around a new steady state and risks identified during any transition, are there any other reasons for imposing limits? How should such potential limits be structured?

  1. The FPC set out its expectations on stablecoins in the December 2019 Financial Stability Report. The first expectation addressed the financial stability risks associated with the payment functionality of stablecoins. The second FPC expectation relates to the use of stablecoins as money-like instruments.

  2. In the Discussion Paper, the Bank had noted four key components of the banking regime that should be reflected in the regulatory model for systemic stablecoins in order for them to meet the FPC’s expectations: (i) capital requirements; (ii) liquidity requirements; (iii) a legal claim; and (iv) a backstop to protect coinholders. The backstop consists of the resolution regime and deposit guarantee scheme, which ensured that depositors were compensated up to £85,000 if a bank failed, the continuity of critical economic functions for systemic banks and financial stability was supported.

  3. In this context, interoperability refers to the ability of users to switch, without barriers or undue friction, between different forms of sterling money and different payment services.

  4. Respondents did not generally explain why in their common view this would be higher for CBDC than stablecoins but it would be consistent with CBDC being a risk-free form of central bank money.

  5. The backstop consists of the resolution regime and deposit guarantee scheme, which ensured that depositors were compensated up to £85,000 if a bank failed, the continuity of critical economic functions for systemic banks and financial stability was supported.

  6. See Central Bank Digital Currency Opportunities, challenges and design.

  7. See Financial Stability Report, December 2019.

  8. See UK regulatory approach to cryptoassets and stablecoins: consultation and call for evidence.

  9. In the Discussion Paper, the Bank had noted four key components of the banking regime that should be reflected in the regulatory model for systemic stablecoins in order for them to meet the FPC’s expectations: (i) capital requirements; (ii) liquidity requirements; (iii) a legal claim; and (iv) a backstop to protect coinholders. The backstop consists of the resolution regime and deposit guarantee scheme, which ensured that depositors were compensated up to £85,000 if a bank failed, the continuity of critical economic functions for systemic banks and financial stability was supported.

  10. Question 1 to 4 of the discussion paper survey were about the identity of respondents.

  11. FSA 2021 stipulated cashback without a purchase as a non-regulated activity, meaning that from June 2021 all shops, newsagents and retailers can provide such cashback to facilitate access to cash. Furthermore, the LINK ATM Scheme is designed to protect free-to-use ATMs more than a kilometre away from the next free-to-use source of cash.

  12. From a total of 65 organisation and 967 individual responses to the question: Do you agree with the Bank’s view on protection and privacy? What would you regard as a minimum set of protections?

  13. For example, using cash to switch between different bank accounts or using interbank payment systems that settle in central bank reserves.

  14. The Bank is a member of the Joint Authorities Cash Strategy (JACS) Group. This was set up by HM Treasury to ensure that the UK’s cash infrastructure remains resilient, cost effective, sustainable, and can meet the needs of users, particularly in a future environment of lower cash usage. A key focus for the Bank in meeting this aim is the future of the UK’s Wholesale Cash Distribution Model.

  15. Respondents did not generally explain why in their common view this would be higher for CBDC than stablecoins but it would be consistent with CBDC being a risk-free form of central bank money.

  16. For more information on monetary policy, see Monetary Policy.

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