In a speech to the Brookings Institution on Thursday, September, 3, the head of the Bank of England warned about digital currencies like Bitcoin.
He said that the leading crypto has “no connection” to money. He added that the bank is still discussing a central bank-backed digital currency (CBDC).
Despite this warning, Bank of England Governor Andrew Bailey did discuss automation in finance. In fact, the title of the speech “Reinventing the Wheel (with more automation)” certainly supports new technology in monetary policy.
The thesis of the speech was that finance was awash with innovation. Bailey admitted that there were tons of new and interesting ways to make payments. In July 2020, Bailey said the Bank of England was floating the idea of its own digital currency.
Unfortunately, innovation is not enough. Bailey was critical towards cryptocurrencies. He pointed out that though blockchain technology may be impressive, the innovation has not actually led to efficiency. (Tell that to Nano lovers).
Bailey underlined his pragmatic view on digital currency,
Payments regulation should reflect the financial stability risk, rather than the legal or technological form of payment activities.
This is a slight change of tune from March when he said that bitcoin holders should be prepared to lose all their money.
Currency, but Not Money
In essence, Bailey believes that the role of the central bank is fiat money. Monetary policy should control a currency that is regulated by a central bank. In theory, a government is able to claim fiat cash as its own because it can levy taxes in order to back up the value of its currency.
The problem is, Bailey said, that cash itself is going out of fashion. Digital payments were on the rise before the pandemic, but cash withdrawals in the UK were down 60% from their normal levels since quarantine began.
This underlines the need to deal with payments digitally. Bailey argued, however, that cryptocurrencies like Bitcoin were not the answer. Cryptocurrencies, in his view,
…have no connection at all to money. They may have extrinsic value – you may like to collect them for instance, and as such they are a highly risky investment opportunity. Their value can fluctuate quite wildly, unsurprisingly. They strike me as unsuited to the world of payments, where certainty of value matters.
Unlike fluctuating currencies, stablecoins could “offer useful benefits.” They are a consistent basis for money transfers with lower friction. Bailey believes,
If stablecoins are to be widely used as a means of payment, they must have equivalent standards to those that are in place today for other forms of payment types and the forms of money transferred through them.
He goes on to propose that a useful stablecoin must present “no risk” and not low risk. Exchange for fiat must be available at all times. He suggested some international standards for useful stablecoins.
As such, the speech does hint about a CBDC for the UK. The Governor said that the Bank of England is still working through the idea of a digital currency. Unfortunately, he could not provide a final decision.
Finally, Bailey addressed the question of whether stablecoins could work as a central bank-backed currency,
The question is a good one and should be considered (and is being so) but the answer is not in yet. It’s a very big question.
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