Stablecoins that are meant to be an alternative to traditional currencies aren’t steady enough for widespread use by consumers, a Bank of England official said.
Andrew Hauser, executive director for markets at the UK central bank, said the digital currencies such as TerraUSD and Tether lack real-time information about their value and details about how they maintain convertibility.
“Stable they are not,” Hauser said Wednesday in a text of remarks prepared for a panel hosted by the Federal Reserve Bank of New York. “Holders of such coins must accept at least the possibility of finding themselves badly out of pocket.”
The remarks are part of the BOE’s effort to build the case for regulating digital currencies, which they see as an increasing risk to the financial system. The $1.7 trillion market is now bigger than the subprime mortgage were when they upended global markets in 2008.
TerraUSD and Tether once were key to the digital currency system, offering users a predictable way of trading money. Yet the former saw its value recently fall to zero over the course of a few days, while the latter dropped below parity. Hauser said that regulators will take a greater interest in the securities as their use grows.
“Buyer beware warnings may be sufficient for coins that are only in niche use, but they cannot be enough for any that reach systemic scale,” Hauser said.
Those rules may require issuers to back such coins with deposits at the central bank, he said. His remarks also covered a number of other digital currency topics, noting that:
- A “central bank digital currency” or CBDC for retail investors could have big implications for bank balance sheets
- Monetary policy would be affected by governments issuing a CBDC because digital currencies don’t fund loans at the moment
- Central bank balance sheets probably would shift if CBDCs were in use
- “CBDCs, if adopted, would be the first new type of central bank liability for centuries. They could have important implications for the size, composition and risk profile of our balance sheets; for the monetary policy transmission mechanism, and for monetary control. We need to understand these effects, and build them into the design of CBDCs”