A digital currency could provide transparency, security and speed of transaction – you could even have your personal account with the Bank of England. However, such money could have sinister consequences if not regulated correctly.
Stablecoins are the less popular sibling of crypto assets. They are different, as they are a payment method rather than an investment or asset. Pegged to an underlying asset they are inherently more stable than crypto as an asset. With a stablecoin, the price is designed to be pegged to a cryptocurrency, fiat money, or exchange-traded commodities (such as precious metals or industrial metals). They are currently a small part of the overall crypto market, worth around the $130bn mark, which is about 5 per cent of the market. That said, their size has doubled since 2020.
Stablecoins have thus far been confined to crypto payment systems, with an emergent and experimental use case being seen in wholesale financial market players and large corporates. Yet it is another facet of stablecoins that is emerging; their potential use by central banks to create a central bank digital currency (CBDC).
A CBDC would integrate into existing payment systems used by financial institutions and would be relatively risk-free; backed by a central bank, like physical banknotes and coins. According to the Atlantic Council (an independent think tank), some 87 countries were exploring issuing a CBDC as of March 2022. Less than two years prior, in May 2020, just 35 countries were considering a CBDC. But now, 14 countries, including India, China and South Korea, are in the pilot stage with their CBDCs and preparing for a possible full launch. Nine countries have now fully launched a digital currency.
Britcoin is the UK’s potential CBDC. It is still in a nascent and theoretical stage of development with lots of talk but not much action so far. However, its establishment is feasible and is thus firmly on the radar of the Bank of England, having been discussed in several speeches and the topic of a discussion paper back in 2020. A Central Bank Digital Currency Taskforce was created in 2021 and the Bank of England is currently in consultation phase to see whether a case for a Britcoin can be made and what its scope would be. The Bank is working with Asos, Spotify and PayPal, among other companies, to consult on its CBDC Engagement and Technology forums with the aim of making any Britcoin operationally and technologically robust. It is thought that the latter part of the decade would be the earliest date for the launch of a UK CBDC.
A framework for e-money through the Electronic Money Regulations 2011 and Payment Service Regulations 2017 does, however, provide a foundation for payment firms in the UK. Although this is not explicitly for stablecoins, it is a good foundation because its framework could be relatively easily applied to stablecoin issuance, and the provision of wallets and custody services, according to a government paper published in early April 2022.
Britcoin does seem to have some support too. In a 2021 speech Tom Mutton, fintech director at the Bank of England, outlined the intention: “CBDC would make central bank money available to the public, in digital form, for the first time. Crucially, if introduced, CBDC would complement – rather than replace – cash and bank deposits.”
Siobhan McArdle, chief executive at L3COS, the fintech company behind an enabling operating system, says: “In many ways, CBDCs will work very similarly to the fiat currencies we use today. They will be minted by a central bank or authority and then distributed through a variety of means. Like fiat currencies, only a limited amount will be minted to maintain and regulate value.”
A Britcoin could be a positive thing. The most obvious benefits are the low costs and the speed of transacting – particularly when it comes to cross-border payments.
There are also benefits for the central bank. In particular when issuing emergency funds instead of printing money to buy up government bonds or other securities, as is currently the case with quantitative easing (where there is a need to lower interest rates by increasing the money supply). Again, using a Britcoin would be cheaper and faster than physically printing money.