On 28 February 2020, Sir Jon Cunliffe, Deputy Governor for Financial Stability at the Bank of England, gave a speech on the future of money to the London School of Economics.
In the speech, Sir Jon highlighted that the concept of money has evolved over time, describing it as a “social convention” and noting that it has been expressed in “very different ways at different times in different societies”, with changes often driven by technology rather than policy interventions. He noted the move in recent centuries from state money in the form of coins, to private money in the form of banknotes, to today’s preference for credit and debit cards.
Sir Jon observed that the recent emergence of cryptoassets (in particular stablecoins – a form of digital currency which may be designed to maintain the value of stablecoins based on an underlying basket of assets and function as a payment system) continues this trend but notes that these more recent changes present at least four key challenges for regulators:
- how to ensure the availability and acceptability of physical cash for as long as people want to use it;
- how to ensure that money remains reliable and stable while taking the opportunity offered by technology to improve the efficiency, effectiveness and functionality of payments?;
- how to respond to completely new systems for holding and transferring value which work not in central bank or commercial bank money but as “stablecoins”?; and
- if technology is able to offer new ways to store value and make transactions (two of the three core functions of money), where should the public-private sector boundary lie?
Sir Jon’s insights in relation to each of these challenges are summarised below:
Availability of cash
In relation to the first challenge, Sir Jon emphasised that the acceptability of cash requires more than its physical production. In particular, he noted that authorities would need to work with the cash industry to ensure the ongoing distribution and acceptability of cash as a medium of exchange, while acknowledging that its declining use had changed the economics of cash distribution. To this end, the Treasury has established the Joint Authorities Cash Strategy Group to co-ordinate efforts in this space.
Ensuring the ongoing reliability of money
With regards to ensuring that money remains reliable and stable despite ongoing developments, Sir Jon noted that recent regulatory initiatives, such as the EU Payment Services Directives, the UK Open Banking reforms and the creation of the Payment Systems Regulator (a new economic regulator for payments in the UK) has opened the payments industry up to more competition. He also noted the recent consolidation of the 3 main scheme companies in the UK as part of the New Payments Architecture. Regulatory developments have also opened up participation in interbank payment systems to non-bank payment service providers.
Sir Jon accepted that the current regulatory regime was primarily focused on the banks and the core payment systems that have traditionally performed most payment functions and that, as innovation and competition introduce more actors into the payments chain, there is a risk the current framework will not capture the full end-to-end risks in the chain. Consequently, the Financial Policy Committee of the Bank of England had recommended to the Treasury’s Payments Review that, going forward, the regulation and supervision of systemically important payments systems should reflect the financial stability risk, rather than the legal form, of payments activities and ensure end-to-end operational and financial resilience across the payment chain.
Sir Jon acknowledged the benefits that stablecoin schemes could bring – in particular, large reductions in the costs of cross-border payments, greater financial inclusion and better functionality. However, he cautioned that regulators should carefully consider associated risks before any stablecoin achieves a systemic footprint. The Bank of England is currently considering these risks via the Financial Stability Board and will report this year on developing appropriate regulatory recommendations. In particular, he cited the example of Libra, which given Facebook’s 2.5bn user base could “very quickly” become systemically important.
Sir Jon noted that some of these risks associated with stablecoins will be similar to those applying to existing payment systems (e.g. the need to maintain confidence in the end-to-end resilience of the platform) but that stablecoins also posed additional risks given they create new money-like instruments for transactional purposes which people may hold as a store of value. He stated that there may also be broader competition, data protection and anti-money laundering issues for regulators to consider, as well as the potential that widespread use of stablecoins may dilute the impact of monetary and financial stability measures, the functioning of credit intermediation, and money creation in the economy (e.g. if people moved from holding money in bank current accounts to holding it in stablecoin virtual wallets provided by non-banks).
The role of central bank digital currencies
Finally, Sir Jon highlighted that the rapid decline of cash and changing nature of payments raised the question of whether central banks should leverage new technologies to provide new electronic forms of central bank money (i.e. Central Bank-issued Digital Currencies (CBDC)) as a complement to existing banknotes.
While Sir Jon noted that such a move could have potential benefits, particularly increased access to and utility of central bank money, as well as afford central banks a more direct control of the monetary transmission mechanism, potential concerns include the implications for the supply of credit to the economy as a whole if the role of banks changed, market liquidity dynamics and the risk that a successful CBDC could become a single point of failure in itself. Sir Jon opined that the extent to which CBDC ultimately substitutes for commercial bank money will depend on both public demand for CBDC and the functions which that CBDC performs.
Sir Jon concluded his speech by re-emphasising that forms of money have always been evolving and that technology is now driving further rapid change. These changes have implications which are broader than finance and economics, making it increasingly important for public authorities to engage in the wider debate.