View from the Chair: “It’s a bank, Jim, but not as we know it”

According to the government, fiat backed stablecoins have the potential to become a widespread means of payment, including by retail customers. It is for this reason that the Financial Services and Markets Bill, currently going through Parliament, contains provisions for the regulation of fiat backed stablecoins by the Bank of England. The new requirements will apply to firms engaged in “activities that issue or facilitate the use of stablecoins used as a means of payment”. The development of this sector of the cryptocurrency world could have widespread implications for the banking system.

Sir Jon Cunliffe’s speech at the Innovate Global Summit in London makes for interesting reading. Sir Jon is a Deputy Governor at the Bank of England and his theme was “The shape of things to come: Innovation in payments and money.” If, like me, you’ve been brought up to believe that, in essence, the banking model comprises individuals and companies putting spare capital on deposit in a bank and the bank lending the money out to borrowers, how aware are you that this model’s days may be numbered. And how concerned should you be?

Sir Jon reminds us that there are two types of money in circulation in the UK, public money, issued by the Bank of England in the form of coins and notes and private money issued by commercial banks in the form of bank deposits. It is clear to everyone that the use of the former is rapidly diminishing as card and online payments continue to increase. It is against this background that the concept of a Digital Pound (a new form of public money) arises. The need, so the theory goes, arises not only from the need to anchor the value and robustness of all money circulating in the UK (a role hitherto performed by cash) but also in a world where non-bank issuers of private money (such as sterling based stablecoins) are likely to emerge. In this case the right of the holder and the obligation of the issuer to be able to convert the private money into Bank of England digital money at par and on demand would secure the anchor currently provided by cash.

However, if depositors of the future choose to give their money to non-bank issuers of private money, for example buying non-bank issued stablecoins, the deposits available to banks to lend will be affected. To what extent this might happen is uncertain but the potential link to the decreasing availability of credit is obvious.

Enter stage left, Big Tech. Whilst the biggest tech companies have not yet established banks, the gap between their current activities and those of a traditional bank are narrowing all the time. If it looks like a duck and quacks like a duck, it’s a duck etc. The threat to the banks from Big Tech comes not only from the possibility that the big tech firms might themselves establish banks but, perhaps more likely, that they will position themselves as non-bank issuers of private money, for example by issuing stablecoins, and given their scale and market reach could potentially shift the dial in terms of bank deposits.

The questions raised here have few answers and any predictions are difficult to make. But we should take comfort from the fact that the regulators seem to be on it. Whilst the FCA, PRA and Bank of England admit that that they don’t and can’t predict the future, we can take some comfort from the fact that they are thinking hard about a new world. It’s a bank Jim, but not as we know it.

 

‘View from the Chair’ is Bovill’s regular column from our Executive Chair Ben Blackett-Ord who founded the firm in 1999 and led it as CEO until 2022. Ben continues to support Bovill’s executive team and clients, as well as being a prominent figure in the industry.

Menu