According to Andrew Bailey, the Governor of the Bank of England (BoE), stablecoins could reduce the UK's reliance on commercial banks, suggesting a potential shift in the central bank's stance on digital assets.

According to the Financial Times, Bailey stated in an article on Wednesday that the current financial system combines money and credit creation through a fractional reserve system, where banks only hold a portion of deposits as reserves while the rest is used for lending. The fractional reserve system refers to banks holding only a small fraction of customer deposits as reserves, with the remainder used for issuing loans, creating new money through credit expansion.

"The majority of the assets backing commercial bank money are not risk-free; they are loans made to individuals and businesses," Bailey wrote, as reported by the Financial Times. "The system does not necessarily have to be organized this way."

Bailey believes that it is possible to "partially separate money from credit supply." In such a system, banks and stablecoins would coexist, with non-bank institutions taking on a larger role in credit supply. However, Bailey also cautioned that "the impacts of such changes must be fully considered before moving forward."

Bailey's comments came after advocacy groups in the UK crypto industry criticized the Bank of England's policies regarding stablecoins. These organizations oppose the Bank of England's plan to set limits on the holdings of individual stablecoins.

According to industry groups, the implementation of such restrictions would be difficult and costly, potentially causing the UK to fall behind other jurisdictions in the stablecoin space. Tom Duff Gordon, Vice President of International Policy at Coinbase, stated, "No other major jurisdiction sees the need to set holding limits."

However, Bailey's remarks may signal a shift in policy direction. He emphasized the need to promote the widespread use of stablecoins in payments and settlements, although he noted that stablecoins and cryptocurrencies have not yet met the relevant standards.

According to the Financial Times, Bailey mentioned that the Bank will release a consultation document on the regulatory framework for systemic stablecoins in the coming months. The new regulations will apply to stablecoins used for monetary purposes, which Bailey explained as "tokenized settlements for everyday payments or core financial markets."

He even pointed out that "widely used UK stablecoins should be able to access [Bank of England] accounts to strengthen their status as money." Bailey explained that this move is crucial for establishing a new regulatory framework that ensures the UK can enjoy the benefits of stablecoins while maintaining financial stability.

Previously, in mid-July, Bailey warned against stablecoins issued by commercial banks and suggested that the Bank of England should focus on deposit tokenization. Allowing stablecoins to hold central bank accounts could become an indirect way to achieve deposit tokenization.

While maintaining an open attitude towards stablecoins, Bailey stated that certain characteristics "require careful assessment," and the relevant assets should be risk-free. Additionally, he suggested providing operational risk insurance for stablecoins, such as against hacking, while establishing uniform trading terms.

Bailey stated, "Innovative forms of money are also viable," and therefore "it is incorrect to oppose stablecoins." He acknowledged their potential to "drive innovation in payment systems."

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Original: “Bank of England Governor: Stablecoins may reduce reliance on banks”

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