Thread by @faisalislam

More #Britcoin

Bank of England Governor Bailey launches discussion paper on difficult questions re “stablecoins” and CB digital money” - “prospect of stablecoins as a means of payment & emerging propositions of CBDC have generated a host of issues..” bankofengland.co.uk/paper/2021/new…

BoE: “opportunities can only be realised if new forms of digital money are safe. They could be privately provided – in form of ‘stablecoins’. Or they could be publicly provided – in the form of a central bank digital currency”..“precautionary arrangements may therefore be needed”

“new forms of digital money are assumed to be denominated in sterling. Unlike cryptoassets such as Bitcoin, which do not have an anchor, they are also assumed to be backed by assets that make them stable in value...”

“stablecoins must promise, credibly and consistently, to be fully interchangeable with existing forms of money. In other words, they must be anchored. This is essential for ensuring that users have the same confidence in stablecoins as commercial bank money”

Bank of England say that stablecoins will lead to more credit coming from non bank sector, could increase cost of credit in banked sector, it may therefore have a transition period where it could “limit migration” to new forms of digital money

Digital money could increase the speed of bank runs in a crisis too, BoE suggests.

To be used as “money” stablecoins would need to abide by certain regulatory norms: “legal claim, capital requirements, central bank support during stress, & a backstop to compensate depositors”

Illustrative BoE scenario is a fifth of UK bank deposits migrate to a safe digital currency, because thats perceived as more safe than uninsured bank deposits (ie those above £85k) this pushes up funding costs, lending rates at banks, and pushes down their provision of credit...

This would disproportionately affect household lending, as it is predominantly done by banks, unlike commercial lending which is 50:50 banks/ non banks

This is why the BoE says it might want the power to limit flows into digital money in a transition.

A bit techy, but it is totally fascinating, with profound implications for sovereignty, financial stability, growth, but also privacy, tracing of transactions. will the commercial banks start issuing stablecoins, as a hedge against losing deposits? Shd they be backstopped by BoE?

Important bit on privacy implications of new digital money, given every transaction tracked, timed, geolocated etc...

One big thinker in the area thinks in more distant future Government would be able to use this for localised stimulus packages in certain towns or postcodes...