Sir Jon’s speech at the London School of Economics covered cash, fiats, stablecoins, and CBDCs.

Sir Jon Cunliffe, Deputy Governor Financial Stability of the Bank of England, spoke at this length last week at the London School of Economics on the subject of money, both old and new. (CROWDFUND INSIDER)

The evolution of money

In his speech titled “It’s Time to Talk About Money,” Sir Jon dwelt on the evolution of money through the past decades. The use of physical cash has dwindled and been replaced by bank accounts, and debit and credit cards.

There has “been a shift from using a form of money issued as a direct claim on the state – the seemingly archaic but very real promise on our banknotes – to money created and issued by commercial banks as a claim on themselves,” Sir Jon said.

Now a new set of players (fintechs), in addition to banks,  provides transaction-related services efficiently using technology.

The most recent development in the evolution of money (not the central bank kind) is crypto-assets. These are a new form of money that replaces the current bank-to-bank machinery for holding assets. Of these cryptos, one kind is a stablecoin that is intended to function as a payment system.

Money as Stablecoins: Gains and risks

The promised benefits of stablecoins are cheaper transaction costs, greater financial inclusion, and better functionality.

“Facebook’s Libra proposal is one high-profile example of a stablecoin proposal that claims such benefits. Given Facebook’s pre-existing network of around 2.5bn users, Libra, if introduced, could very quickly become systemically important. So, whilst any benefits such a proposal might bring would be magnified, so too would the risks. That means the regulatory community must consider those risks carefully before a stablecoin achieves a systemic footprint.” – Sir Jon

“And given the potential and likely use of stablecoins in cross border payments, we are considering these risks internationally within the Financial Stability Board, which will report this year on developing regulatory recommendations with respect to stablecoins.”

Sir Jon also said that stablecoin systems should provide the same end-to-end reliability as do commercial bank money systems. (Principle: “Same risk, same regulation”).

Further, stablecoins would be money-like instruments. They should, therefore, feature the same “stability of value, the robustness of legal claim and the ability to redeem at par in fiat,” as commercial bank money.

What if stablecoins became mainstream?  This is a possibility since stablecoins link to large technology and social media platforms. And what if people moved all their money out from banks and into wallets?

“In such a world, and depending on how and whether stablecoins were backed with other financial assets, the supply of credit to the real economy through the banking system could become weaker or indeed disappear. That would be a change with profound economic consequences.” – Sir Jon

Next in the evolution of money: Central bank digital currencies (CBDCs)

CBDCs may provide a host of benefits. These include continued access by the public to a risk-free form of money, and “a more resilient, innovative and competitive payments system for UK households and businesses.”

CBDCs could also provide better utilization of central bank money and quicker transmission of monetary policy measures.

“But for all the opportunities, there are also some significant potential implications. Some of these are very similar to those I have discussed earlier with regard to private stable coins such as the implications for the supply of credit to the economy if the role of banks changes, liquidity dynamics both in normal times and in stress, and the risk that a CBDC is too successful and becomes dominant and a single point of failure in itself.”

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