Deputy Governor of Bank of England Sir Jon Cunliffe recently warned that in the cryptocurrency oriented economy, the supply of credit through the banking system could disappear.

 He further pointed out the risk from Facebook’s Libra and other global stable coins and cautioned that this would be a change with “profound economic consequences,”

While speaking at the London School of Economics(LSE), he expressed, “A new wave of technological development that enables the transactional use, not of central or commercial bank money, but rather a new form of assets, so-called ‘crypto assets’.”

While expressing his views about stablecoins, Cunliffe said that there is a possibility that through the stablecoins linked with social media with the advantage of technological development, it will be popular among the masses to shift from their money from current accounts to virtual wallets provided by non-financial institutes. (He was pointing indirectly towards the Facebook’s Libra).

He said, “In a world where stablecoins are supported with other financial assets, the supply of credit to the real economy through the traditional banking system becomes weaker or might disappear. This change can arrive with profound economic consequences.”

Growing Risk from Stablecoins and Libra to the global central Authorities

The Bank of England has been wary of the stable coins and Facebook’s Libra project and previously had cautioned about Libra and other new forms of payments and expressed the concern while stating that they should be carefully allowed to launch. 

As per Cunliffe, “Authorities needed to ensure that any stable coin used as money, meet the standards applied to commercial bank money and passed other tests in areas such as competition, data protection, and anti-money laundering”.

He informed that this year the Financial Stability Board (FSB) will release an evaluation report on regulatory recommendations regarding the stablecoins

Global Central Authorities wary of growing Adoption of the crypto-assets

Many governments have been apprehensive about the Libra’s supposed domination on the global economy. Almost all major powers are trying to address the income threat to their economies. Last week the G20 members and central bank governors had issued a cautionary statement that they reiterate their previous statement in October 2019 about the global stablecoins.

They had then expressed that any such risks should be evaluated and appropriately addressed before their launching and should support the Financial Stability Board (FSB)’s efforts to develop regulatory guidelines for such arrangements. They have the potential to scale from launch. 

Cunliffe’s statements are very much similar to the report released by Bank of Settlement (BIS) in October 2019. The report which was titled “Investigating the impact of global stablecoins” echoed the same sentiment that how the coins could increase vulnerabilities in the broader financial system through diverse channels. 

The report mentioned a few possibilities about the growing crypto assets' significance. The first consequence they mentioned was that the retail deposits at banks would be reduced, secondly, the banks would lose their credibility and thirdly the banks will have to bear huge financial losses. 

Jayashree Ingle

CBW - External Analyst

INDIA