Andrew Bailey, Governor of the Bank of England, recently discussed innovation in payments at a virtual event hosted by the Brookings Institution. His wide-ranging speech explored cryptoassets, e-money, stablecoins, and the need for international standards to effectively govern these developments.
Andrew Bailey on…cryptoassets
The Governor discussed the way in which cryptoassets have "started to strain" at the regulatory frameworks implemented by central banks seeking to ensure "appropriate legal finality of settlement and operational resilience." He explicitly referenced bitcoin, and asserted that such cryptoassets "have no connection at all to money". Referencing the "wild" fluctuation in cryptoasset values, he gave his opinion that they are therefore "unsuited to the world on payments, where certainty of value matters."
These comments have been widely reported as a damning dismissal of bitcoin's utility as a payment mechanism. Indeed, such a statement is consistent with the Bank of England's historic position on bitcoin and other similar cryptoassets. This position is unsurprising – aside from the valuation issues highlighted by Bailey and technical limitations pertaining to scalability, central banks such as the Bank of England cannot implement monetary policy and regulatory oversight on fully decentralised assets such as bitcoin.
Andrew Bailey on…e-money
The Governor also looked at "alternative payments such as e-money, which in Europe has grown under the auspices of the Second Electronic Money Directive (EMD2) and the Second Payment Services Directive (PSD2)."
Bailey asserted that e-money represents a "hybrid" that involves something "more money-like in the sense of commercial bank money" but without some of the protections afforded to fiat money. Bailey noted that "standards [for e-money providers] are less developed than those for banks, there is no depositor protection scheme, and firms are subject to only limited capital and liquidity requirements." Importantly, Bailey highlighted that no resolution or administration regime for e-money providers, and warned that "if [an e-money provider] failed, holders of its 'money' would be forced to pursue any recovery through a corporate insolvency procedure, which would neither be quick nor guarantee their funds back."
These comments are in-line with the Bank of England's focus on preserving and enhancing existing payment channels and systems, while e-money seeks in provide an alternative. For example, the Bank of England has committed considerable resource to its RTGS Renewal Programme, which aims to deliver the next generation of its real-time gross settlement service.
Andrew Bailey on…stablecoins
The Governor's speech focussed on stablecoins, a class of cryptoasset that is underpinned by or pegged to a stable asset or basket of assets. The value of Tether ($USDT) for example is intended to mirror the value of the US dollar, while the value of the upcoming Libra cryptoasset backed by Facebook is understood to be pegged to a basket of global fiat currencies including the US dollar, the euro, the yen, British sterling, and the Singapore dollar.
Bailey asserted that stablecoins "could offer some useful benefits". In particular, Bailey noted that:
"…[stablecoins] could further reduce frictions in payments, by potentially increasing the speed and lowering the cost of payments (particularly if global stablecoins were to be established). Stablecoins may offer increased convenience, including via integration with other technology, such as social media platforms or retail services."
Bailey acknowledged the possible relationship between stablecoins and central bank digital currencies (CBDCs), and referred to the CBDC Discussion Paper published by the Bank of England earlier this year. He also referred to the paper by the July 2020 Brookings Institution paper entitled 'Design Choices for CBDC', which explored various CBDC-related issues, "as well as key technological points on the need for interoperability and connectivity between and among central and commercial bank systems for CBDC to function effectively."
The Bank of England continues to position itself at the forefront of global CBDC thought-leadership, though the fact that discussions remain focussed on design and policy considerations suggest that actual development remains some way off. By comparison, projects in China, Japan, the Middle East, Scandinavia, Latin America and the Caribbean are further progressed.
Andrew Bailey on…the need for international standards
The Governor provided a helpful overview of the important policy considerations that underpin modern payment systems. The following extract in particular concisely articulated the point:
"To reiterate, a key principle for payments is that users can be confident that the instrument they use to transfer value can be converted into fiat money at any time. And, in the rare circumstances that the entity that issued that instrument fails, that there are clear rules and protections for the payment recipient and for the consumer. It is this assurance that stabilises the value of the transfer asset so that all parties in the economy can rely on it. Banks achieve this by giving the customer a money claim at par, supported by banks’ access to central bank facilities and extensive regulation of banks’ activities, including a protection scheme for customer deposits up to a certain amount. It is these protections that mean that individual shop owners don’t worry about scrutinising which bank issued your debit card before you tap it to pay. It is these protections that prevent a return to the literal wild-west in which individual banks issued their own private currencies, which were worth different amounts depending on recipient’s assessment of the soundness of the issuing bank."
Bailey called for standards to be set early on, "so that innovation can take place with confidence on what will be required." This is an encouraging statement, in line with the advice we have provided our public sector clients.
Bailey also acknowledged that "a global stablecoin is a cross-border phenomenon" and that "[t]he regulatory response must match this." He argued that "[t]here needs to be a clear G20 mandate for the various sectoral standard-setting bodies to consider their standards and whether they need to be refreshed or clarified in light of stablecoins." This, Bailey argued, is "necessary to truly deliver on the principle of same risk - same regulation."
The Governor echoed the G7 Working Group on Stablecoins' October 2019 publication, which argued "no global stablecoin project should begin operation until the legal, regulatory and oversight challenges and risks…are adequately addressed, through appropriate designs and by adhering to regulation that is clear and proportionate to the risks." The challenge now for the Bank of England and other central banks is to produce thoughtful, effective and flexible policy, oversight and regulation that keeps pace with innovation is payments. We are enjoying advising our clients as they seek to rise to this challenge.
A transcript of Andrew Bailey's speech can be read in full here.