It also raises questions about the operation of anti-money laundering and other regulation to prevent illicit finance. An alternative to allowing tokenised deposits to circulate freely and be directly transferable would be to require transactions on new forms of ledger, for example transactions in smart contracts involving tokenised deposits, to be settled ultimately by the adjustment of bank ledgers as happens now. In other words a transfer of tokenised deposits on one set of ledgers would trigger the adjustment of individuals’ bank account balances and be settled by a transaction between the banks involved. In that case, deposit money issued by a bank could only ever be held in an account at that bank. It is important that as we develop the regime for payment stablecoins, we also develop the approach for tokenised bank deposits. This will allow, banks and non-banks alike, that want to develop payment solutions using new technologies to understand clearly what is possible and what is required in the respective regulatory regimes. The PRA intends to set out its approach in this area alongside the Bank’s consultation on the payment stablecoin regime. It is of course possible that commercial banks might wish to offer payment stablecoins as opposed to tokenised bank deposits. In such cases, I think we will need to be very alive to the risks of confusion on the part of customers as to protections they are entitled to and confusion of business models within the bank itself.
We are currently considering which of these options is most appropriate. In doing so, we will need to take two important considerations into account. The first is that, unlike commercial bank money which is protected by deposit insurance up to £ it will not be possible – initially at any rate – to give stablecoin holders industry funded protection against failure of the coin. This reinforces the need to ensure that the backing assets are at all times of sufficient value to meet redemption requests. And it also highlights the potential role of capital requirements. The second consideration is that the underlying objective of the legislation and the ensuing regulation is to open further the frontier for safe and sustainable innovation and competition in payments. Stablecoin business models should in general reflect this and be grounded in improved payments efficiency and functionality rather than in maturity transformation. There are other important questions to be resolved, such as whether there should be limits, initially at any rate, on stablecoins used for payments. While, from a public policy perspective, we want competition and innovation in payments we need to guard against rapid, disruptive change that does not allow the financial system time to adjust and could therefore threaten financial stability. The risks to financial stability from the development of digital money issued outside the banking system has been the subject of extensive analysis. The Bank of England’s assessment is that over time, the financial stability risks should be manageable including risks from the impact on the banking system[15].