The governor of the Bank of England, Andrew Bailey, has stated that stablecoins must have the characteristics of “inside money” and be regulated as such in order to function as money. Bailey also argued that stablecoins lack the “assured value” that the public expects to see in digital money. Bailey’s comments come after the collapse of Terra’s stablecoin, UST, in 2022. In a speech at the Institute of International Finance, Bailey stressed the need for public confidence in stablecoins to underpin financial stability.
Bailey described crypto as a “highly speculative investment” with no intrinsic value, adding that such digital assets cannot function as money because they lack the stability of value required for money to fulfill its function as a means of payment. Bailey’s comments echo concerns held by many other financial authorities regarding the volatility and lack of regulation in the crypto market.
Bailey also discussed the central bank’s current definition of money, which relates to assets that can be used as a store of value or a payment method. According to Bailey, money can be defined further using terms such as inside money, commercial bank money, or outside money, which is central bank money. Stablecoins may only “purport to be money as a means of payment” unless they acquire the characteristics of money, Bailey added.
Bailey stressed the need to “revisit the protection of inside money” following the recent banking crisis sparked by the collapse of Silicon Valley Bank. He highlighted the importance of protecting inside money in smaller banks to ensure financial stability.
Stablecoins have grown in popularity as a digital alternative to traditional financial instruments due to their perceived stability and ability to maintain a constant value. However, the collapse of Terra’s UST highlights the risks involved in investing in such digital assets, as they lack the same level of regulation and protection as traditional financial instruments.
Bailey’s comments may trigger a closer examination of stablecoins and greater regulation of the crypto market, including measures to protect investors and minimize the risks of financial instability. As the crypto market continues to grow and evolve, it is likely that financial authorities will continue to closely monitor its developments and adapt their regulations accordingly.