While the technology has changed beyond all recognition, all of these systems are economically the equivalent of 18th century bank clerks with quill pens altering their banks’ ledgers to debit one account and credit another whilst addressing shortcomings. Some of the most high-profile of these have been so-called ‘stablecoins’. Unlike Bitcoin, these aim to ensure a stable value for the digital coin via some form of link to or backing by a stable financial asset such as Government bonds. They use technology platforms, such as blockchain, across which transactions in these new digital coins can be exchanged. Stablecoin developers have claimed a number of benefits that such schemes could bring, including very large reductions in the costs of payments, especially cross border (due in part to the much shorter chains of payment actions and smaller number of actors), greater financial inclusion through easier and cheaper access to payment services for the ‘unbanked’, and better functionality. These proposals have, to be fair, shone a light on some of the failures and costs of the current domestic systems, for all the improvements we have seen. And this is particularly true for cross border payments: retail cross-border payment systems are relatively slow, expensive and unreliable and many do not have access to them. Facebook’s Libra proposal is one high-profile example of a stablecoin proposal that claim such benefits.
Stablecoins however pose potential risks that go beyond those usually associated with existing payment systems because they also create new money-like instruments for transactional purposes and which people would hold as a store of value in the way they hold central bank or commercial bank money. Applying the principle of same risk same regulation, we therefore need to ensure that, where stablecoins are used in systemic payment chains as money-like instruments, they meet standards equivalent to those expected of commercial bank money in relation to stability of value, robustness of legal claim and the ability to redeem at par in fiat. Stablecoin proposals raise broader regulatory issues, e.g. for competition, data protection, anti-money laundering and counter terrorist financing. These are for other authorities and I won’t go into them here, but the principle of same risk same regulation applies with equal force. We also need to look at the possible wider dynamic effects of stablecoin systems should they grow to a systemic size – and in particular the impact on monetary and financial stability and on the function of credit intermediation and money creation in the economy. It is difficult to predict how behaviour would evolve.