In a speech to the Brookings Institution on 3 September 2020, Andrew Bailey, the Governor of the Bank of England, took the opportunity to opine on money, and the future of payments. In doing so, he sought to look beyond the features of any particular crypto-asset or payments mechanism, and consider the fundamentals. Money, Bailey notes, “has social and not just financial functions” and its changing nature, particularly in light of the drastic decrease in the use of physical currency as a result of the COVID-19 pandemic, should give us pause to consider implications stretching beyond the exchange of value.
The speech considers the recent disparity between the steadily declining use of cash and the increasing pace of innovation behind payment solutions – contrasting the established, well-regulated commercial payment systems against more recent solutions. Amongst these, Bailey notes the increasing prevalence of e-money, which he brands a “hybrid” bearing distinct similarity to commercial bank money, but lacking the same safeguarding regime and direct link to fiat money.
The speech goes on to reflect on the growing prospect of global stablecoins, the form they might take and the unified, international and proactive approach which Bailey feels is needed to establish a firm regulatory framework. This regulatory approach, he feels, is essential to provide a secure environment in which global stablecoins might flourish without endangering consumers. Bailey strikes a similar tone when considering the prospect of digitised central bank currencies, which he is swift to note need thorough consultation and consideration in order to weed out some profound but as to unconsidered side-effects on, say, the cost of credit or transmission of monetary policy.
Perhaps of particular interest, however - not least to those who continue to tout the potential of crypto-currencies to change the world - Bailey offers a brief reflection on crypto-assets. He conclusively remarks that bitcoin and its peers, with their lack of “extrinsic value” constitute nothing more than a “highly risky investment opportunity”. Certainty of value, Bailey notes, is essential in the world of payments and the wild fluctuations of value which have become synonymous with some crypto-assets leave them unfit for purpose in the world of payments.
Regardless of the assessment of each solution, Bailey is right to highlight that with rapid innovation must necessarily come a flexible regulatory regime, which will require adept navigation as it attempts to keep pace.
We must therefore set standards early on so that innovation can take place with confidence on what will be required. This gives certainty not only to regulators and users but also to innovators.