55.Central banks are increasingly concerned by the growing demand for privately issued stablecoins and other crypto assets which operate outside their supervision. While the market for stablecoins is still small compared to traditional asset classes, their role in the financial sector is growing. Figure 2 shows that since early 2020 the total supply has grown from around $5 billion to over $125 billion. The Bank of England has said that CBDCs may reduce demand for stablecoins or “money like instruments”.
56.Stablecoins can be used as a bridge between national currencies and the crypto asset market, allowing traders to convert traditional currencies more easily into crypto assets. They can be lent as collateral for trading, or to generate high yields in the form of interest. Stablecoins are also used in blockchain-based decentralised finance applications. For example, Ethereum, a blockchain network, supports a multitude of decentralised finance applications which provide financial services without the need for commercial banks or the complex infrastructure which supports payments. In the second quarter of 2021, the value of transactions validated by Ethereum was around $2.5 trillion, which is comparable to Visa—one of the world’s largest payment companies. The Blockchain Association said stablecoins could enhance financial inclusion, make cross-border transactions more efficient and create a stable store of value for users.
57.However, these crypto assets are largely unregulated and pose risks to financial stability.
58.First, we heard that widespread adoption of different, non-interoperable forms of private money risks fragmenting the payments system, which could undermine the ability of central banks to implement policies for monetary and financial stability, eroding the state’s monetary sovereignty. Patrick Honohan, a former Governor of the Central Bank of Ireland, told us that central banks were exploring CBDCs as a defence against the growth of big tech companies:
“It is a question of arming oneself against an uncertain future in which there will be very powerful commercial firms with reach well beyond the financial system whose activities could be damaging to the mandate of the central bank and lead to wider societal concerns. Most central banks do not talk about this too much, but if you ask them about it, they will come out and say they are concerned about the monopoly power of, for example, the Facebook Meta organisation, which could be exploited to the disadvantage of the general public.”
59.On 6 October 2021, Agustín Carstens, General Manager of the Bank for International Settlements, said that big tech firms could issue stablecoins to users of their vast networks, enabling rapid and large-scale adoption, yielding excessive market power. He said this would “threaten financial stability, fair competition and data governance” and thought CBDCs could be a solution.
60.Second, we heard there is a risk of a ‘run’ on stablecoins if investors no longer trust they are backed by the assets their issuers claim. Dr John Hawkins, Senior Lecturer at the University of Canberra, said, “given there are doubts about the backing, stablecoins would be vulnerable to a run in the same way as unregulated banks without deposit insurance. If this were to happen to a large stablecoin issuer it could be very disruptive to financial markets”. Trust in the world’s most-used stablecoin (comprising just over half the market) has been called into question already. In February 2021, Tether was fined $18.5 million by the New York State Attorney General for misleading investors over the extent to which its currency was backed one-to-one by US dollars. In October 2021, it agreed to pay $41 million to the US Commodity Futures Trading Commission in a settlement over similar allegations. Tether did not admit or deny wrongdoing.
61.Third, some stablecoins rely on technology that may be unreliable. Prof Duffie told us there had been service outages involving some stablecoins which could cause financial instability if large numbers of people relying on them cannot access them. He said in the future, this risk could extend to the international level if a stablecoin were to dominate the monetary system of another country (as the US dollar has in some South American economies) and similar failures occurred.
62.The extent to which a CBDC would meet the demand for stablecoins is not yet clear. UK Finance told us that UK consumers and businesses may continue to acquire crypto assets regardless of whether a CBDC is issued by the Bank of England: “many consumers could choose to acquire crypto assets as an investment opportunity or due to a lack of trust in central bank fiat currencies.”
63.We heard that greater regulatory control over stablecoins might be sufficient to manage risks, although there are technical and jurisdictional issues to overcome. Simon Gleeson, a partner at Clifford Chance, said, “the nature of the internet is such that the creator of these [decentralised stablecoin] instruments can be anywhere in the world, and to create a set of rules that keeps them out of the country is for all practical purposes impossible.” While it would be difficult to regulate all stablecoins reliably, we heard it would likely be possible to regulate those that may become systemically important. Barry Eichengreen, George C Pardee and Helen N Pardee Professor of Economics and Political Science at the University of California, Berkeley, said, “if the concern is with the concentration of payments in a single or small set of private hands, then the obvious solution is to strengthen regulation of those private providers.” Prof Duffie told us that stablecoin issuers should operate under equivalent compliance standards expected of commercial banks.
64.Governments and regulators have made proposals to regulate stablecoins and other crypto assets. In 2019, the G7 and the Financial Stability Board assessed the impact of global stablecoin arrangements and made recommendations. On 6 October 2021, the International Organisation of Securities Commissions, whose members are financial regulators, published a consultation paper which set out guidance on applying financial market standards to stablecoins. The guidance stated that the international standards for payment systems apply to stablecoin payment arrangements and that a stablecoin system needs to be governed by one or more accountable legal entities.
65.Andrew Bailey, the Governor of the Bank of England, said the Bank does not regard crypto assets as a direct threat to financial stability now, “but we regard it as having the potential to be a threat to financial stability, which is why we think we need to take action on that front.” He said the Bank and the Government faced a choice to regulate stablecoins or to introduce a CBDC which may make a “better contribution” to financial stability.
66.We heard that some central banks are concerned that big tech companies will combine crypto asset technology and their vast network of users to launch a digital currency capable of rapid adoption by large numbers of people. While we agree this is a risk, the introduction of a CBDC may not be a necessary or complete response. Private entities of a size that can compete with the existing payments systems can and should be regulated. The Joint Taskforce should set out answers to the following questions:
67.The Bank of England’s March 2020 Discussion Paper said, “the most important design decision for CBDC would be whether to … pay interest on CBDC balances.” The rate of remuneration would be a key determinant of how attractive a CBDC would be compared to other forms of money.
68.An unremunerated CBDC (one that does not pay interest) would affect the Bank of England’s ability to implement monetary policy, particularly in a deflationary economic environment. This is because a CBDC paying zero interest could put a floor on how low the Bank could set interest rates to stimulate spending and investment. While cash offers the same option today, it is generally impractical for people to store significant amounts of cash. This may not be the case with CBDC, although one design option might be to limit the amount of CBDC an individual can hold.
69.A remunerated CBDC (one that pays interest) may also have implications for monetary policy. This is because the proportion of money linked directly to interest rate changes would increase, enabling them to be passed on faster and more fully. We heard that this could bring the central bank into competition with commercial banks, as commercial banks would have to choose between responding to the CBDC interest rate or losing depositors. This risk is explored in more detail below in the section on banking and disintermediation.
70.Most witnesses were sceptical that a CBDC should be remunerated. Simon Gleeson, a partner at Clifford Chance, said, “I cannot see how a token with a fluctuating value can perform the function of a unit of currency.” Prof Duffie, expected most countries not to pay interest on CBDCs, although he noted that the European Central Bank has discussed the possibility.
71.A digital currency could enable the Bank of England to conduct forms of unconventional monetary policy more easily. We heard the Bank of England could ‘programme’ a CBDC to have an expiry date by which it would need to be spent, or conditions could be placed on a CBDC so that it could be spent on certain goods only. The Atlantic Council said that a review of pilot projects across the world showed that no central bank is implementing an interest-bearing or programmable CBDC as a possible crisis-response measure. It said, “these are theoretical concerns at best and are unlikely to be featured in any first phase CBDC project.”
72.Martina Fraschini, Luciano Somoza and Tammaro Terracciano, academics based at the Swiss Finance Institute, said that it might be difficult for central banks to resist pressure to use new CBDC-derived monetary capabilities during an economic crisis. Patrick Honohan thought it would be inappropriate to legislate against central banks having access to new monetary policy tools as a result of CBDCs, as this might prevent them taking necessary action quickly. Prof Prasad, agreed but added:
“putting in place some guardrails about what sort of circumstances might be enough to trigger such actions might be useful, but ultimately this is going to have to be at the discretion of central banks.
While these are very useful policy tools, it should be borne in mind that the more one undertakes these operations, such as helicopter drops of money, that are really fiscal operations through the central bank, the greater the risk there is of the central bank being seen as an agent of the Government rather than an independent institution. That could have some far-reaching ramifications.”
73.Sir Jon Cunliffe said the potential for CBDCs to solve some problems should not be disregarded just because, “you might be creating a technology that might at some future point be used for a purpose you did not intend”. Andrew Bailey did not see a CBDC as a tool to implement monetary policy: “Negative interest rates and helicopter money are not, for me, the reason that lies behind any of this … I am going to take a lot of persuading to come off that view, frankly, but you never know.”
74.While it is yet to be established whether any future UK CBDC would bear interest, over the last decade many central banks have become accustomed to unconventional monetary policies. A CBDC would provide them with new options for responding to crises.
75.However, the application of monetary policy should not be a motivation for introducing a CBDC. Such measures would likely increase the Bank’s role and influence in the economy substantially. Scrutiny of any changes to the Bank of England’s monetary policy toolkit is essential. We recommend that the Joint Taskforce publishes its assessment of the potential for monetary policy via a CBDC in its 2022 consultation. This will assist such scrutiny.
76.If a CBDC is introduced, a proportion of people may wish to transfer money out of their bank accounts into non-bank CBDC wallets. This would reduce the size of commercial banks’ balance sheets while increasing the size of the Bank of England’s balance sheet. This process is known as ‘disintermediation’. It would be an inevitable consequence of launching a retail CBDC.
77.Largescale disintermediation will have implications for the availability of credit, the stability of the banking system and for monetary policy. That said, it is unclear how much disintermediation might take place; the scale will depend largely on how attractive a CBDC is to hold and use. As explained above, one of the most important characteristics affecting demand for a CBDC is whether it would bear interest to holders.
78.Attempts to estimate the rate of CBDC adoption have resulted in wide ranges and are sensitive to CBDC design choices. One study found that households could be expected to hold from 4% to 55% of their combined cash and deposit holdings in a CBDC, depending on whether the CBDC had more ‘cash like’ features or whether it was more competitive with bank deposits. Another study found demand for a CBDC could reduce bank deposits by between 4% and 12%. The Bank for International Settlements said more reliable data on disintermediation will soon become available from countries which have launched CBDCs, such as China and the Bahamas.
79.We heard that disintermediation may increase the cost of credit and tighten lending criteria, with implications for the efficiency of credit provision in the economy. Barclays said this was because disintermediation would make banks more reliant on wholesale funding—an expensive and more volatile alternative to customer deposits. It said this could mean banks being required to hold higher levels of liquidity against deposits, which could constrain lending further. HSBC agreed there would be implications for the cost of credit and that it may reduce diversification for bank liabilities, exacerbating exposure to market conditions.
80.Patrick Honohan told us that commercial banks could issue bonds, which may be an expensive funding source, or central banks would have the option to lend their holdings of CBDC deposits back to commercial banks:
“that moves the risk of a bank failure from the depositor to the central bank, but the central bank has lots of information about that. It is not guaranteed that the end equilibrium will be as much altered from [a commercial] bank’s point of view. It may find that it is receiving deposits from the central bank instead of the customers, or alternatively from the bond markets.”
81.John Whittaker, a Senior Teaching Fellow at Lancaster University, told us that under this approach the Bank of England would need to hold high-quality collateral against its loans, which could still result in more expensive credit for bank customers. He said the Bank of England could also buy more Government debt (similar in practice to quantitative easing) or more corporate debt so that the bank deposits that had been withdrawn to buy a CBDC would be replaced by deposits from sellers of either government or corporate debt. These new deposits would likely be exchanged for longer-term claims on the banks such as term deposits of debt securities bearing higher interest rates, which again could cause banks to raise lending rates. He concluded, “the decision over whether the Bank of England should implement CBDC thus presents a trade-off: a doubtful improvement in payments efficiency at the cost of potentially more expensive retail borrowing.”
82.The risk of a CBDC accelerating disintermediation would be most acute in a financial crisis, against a backdrop of falling confidence in the banking sector when people are motivated to exchange bank deposits for safer central bank money. A CBDC could make this process considerably easier and faster, potentially facilitating a ‘digital run’ on banks. The Bank of England, in a report co-authored with six other central banks, said although the existence of deposit insurance helps to ensure bank runs are rare, there is a concern CBDCs could make such events more “frequent and severe”, with them unfolding with “unprecedented speed and scale”.
83.There are two main options for reducing the risk of disintermediation. The first is to limit the amount of CBDC that can be held or spent. Prof Prasad told us that the Bahamas had capped the amount of deposits that can be maintained in a CBDC account by household, with a slightly larger cap for businesses. The second is price-based measures that can be used to disincentivise large holdings or large payments in CBDC via uncompetitive (or prohibitive) interest rates or fees. A tiered approach to paying interest on CBDCs is possible, in which one rate of interest is paid on holdings below a certain threshold and a lower amount above. Patrick Honohan said the use of uncompetitive interest rates would not be effective if there is a bank run.
84.We heard that these two options present a further trade-off in that they would make CBDCs less attractive to use. For CBDCs to benefit the payments system, there needs to be enough CBDC holders for a significant proportion of retail transactions to be between CBDC accounts.
85.When we asked the Bank of England what effect a CBDC might have on bank disintermediation, we were told the Bank had modelled for 20% of bank deposits to move to CBDC wallets. Sir Jon Cunliffe said that figure “roughly represents all the uninsured deposits” and “we tried to look at the behavioural response if people had an extreme preference for safety… it is a pretty prudent assumption that 20% of household and corporate transactional deposits move to CBDC.” He said, that as a result, “banks would have to adjust. They would have to fund themselves more with long-term wholesale debt. They would lose a revenue stream from payments, which at the moment is quite a reliable and reasonably substantial revenue stream.” He said commercial banks had adapted to changing circumstances before. Andrew Bailey acknowledged the risk of digital bank runs but said the most appropriate way to reduce the risk “is to have appropriate regulation and, even more so, appropriate resolution of banks, so that you can deal with those problems promptly rather than have them take hold.”
86.Introducing a CBDC will lead inevitably to some disintermediation of the banking sector, although how much is uncertain and will depend on how a CBDC is designed. Higher levels of disintermediation would likely lead to more expensive credit and tighter lending criteria. Without safeguards, CBDCs could exacerbate financial instability during periods of economic stress as people would likely seek to replace bank deposits with CBDC.
87.There are two main options for reducing the negative effects of disintermediation. The first is to limit the amount of CBDC that can be held or spent. The second is to disincentivise use by paying uncompetitive (or prohibitive) rates of interest on CBDC above a certain level of holdings. Either of these options, or a combination of both, would likely reduce the attractiveness of a CBDC to users, depending on their stringency. This could undermine other possible objectives such as increasing financial inclusion or crowding out privately issued stablecoins. We recommend that the Bank of England conduct further studies to assess what would be the effect on the banking system if more than 20% of deposits converted to CBDC.
88.We heard that any CBDC system could not support anonymous transactions in the same way that cash can be spent anonymously. This lack of anonymity is to prevent CBDCs facilitating large-scale criminal activity, and to ensure a CBDC system complies with national disclosure laws that apply to payments. This means payments data on CBDC users would exist and would be accessible to some authority or institution. There is concern about the potential for state surveillance or private sector-monetisation of personal information and it will be necessary to decide who can access which parts of payment data sets and under what circumstances. A survey by Redfield & Wilton Strategies found that 32% of people thought the Bank of England would issue a CBDC to monitor how UK citizens use their money.
89.There are different options for managing privacy and supervision. A hybrid model of CBDC architecture would rely on the private sector to manage ‘Know Your Customer’ checks. These are requirements to verify the identity, suitability and risks involved with providing financial services to customers. These include compliance with anti-money laundering and ‘Countering the Financing of Terrorism’ rules.
90.In its 2020 Discussion Paper, the Bank of England set out a model in which the Bank’s core ledger would store pseudonymous accounts and balances, with each account in the core ledger linked to a payment interface provider, who knows the identity of each user and can conduct anti-money laundering and other checks. This arrangement means that the Bank would not hold personal data on any user. We were told both China and Sweden are experimenting with a similar approach, and that China is designing five grades of digital CBDC wallets, including those with different levels of privacy depending on what value of transaction they facilitate.
91.Witnesses said a CBDC would need to be attached to a digital identification system as the only reliable way to ensure that payments were legally compliant. A digital ID is a way to prove who someone is without physical documents. There are a range of digital ID models: some public sector, some private sector, as well as combinations of the two. This might make interoperability across borders difficult. Natasha de Teran, member of the Financial Services Consumer Panel, told us:
“It is more complicated when we get into the cross-border arena, because we might trust say, America’s form of digital ID, but we might not trust somebody else’s, so banks … will have problems in dealing with countries whose IDs they do not support.”
92.The Bank of England’s March 2020 Discussion Paper said that a digital ID may help identify suspicious activity. However, the Department for Digital, Culture, Media and Sport, which is leading the Government’s digital ID project, has not referred to the Joint Taskforce’s work on CBDCs.
93.Andrew Bailey said a digital ID would be needed but it was to be determined whether it would be unique to a platform or “broader in terms of your identity”. He said the assessment of the privacy implications of CBDC was being led by HM Treasury. John Glen, Economic Secretary to the Treasury, told us the Government’s view on privacy would be set out in the 2022 consultation paper. He said, “the UK, through its work at the G7, has been clear on the rigorous standards of privacy, accountability and transparency that we wish to work under. Those principles would guide us in how we frame the consultation.”
94.Widespread adoption of any CBDC would depend on a high level of public trust. While there are design options that would provide some privacy safeguards, technical specifications alone may be insufficient to counter public concern that a government might use a CBDC as an instrument for state surveillance. The Bank risks being drawn into controversial debates on privacy, which could undermine its reputation for independence from the Government.
95.The Bank of England has indicated that it favours a private sector led approach for managing ‘Know Your Customer’ checks. However, there is significant public concern over control of consumer data, particularly by big tech. The requirement to provide ‘Know Your Customer’ checks may reduce the incentives for new companies to provide CBDC payment services, particularly if the checks are onerous or expensive to complete. While conducting such checks will be necessary, their cost may undermine the objective of using CBDC to spur private-sector innovation, or limit involvement to the largest companies or those which have existed the longest.
96.We heard that a digital identification system may be an effective component of any CBDC payment system to ensure compliance with legal requirements. However, the Bank of England’s March 2020 Discussion Paper mentions the possibility of digital ID only in passing, and the Department for Digital, Culture, Media and Sport’s January 2021 consultation on digital ID does not mention CBDCs at all. The Joint Taskforce should set out whether the Government’s work on digital ID now relates to its work on CBDCs.
74 Bank of England, Central Bank Digital Currency: opportunities, challenges and design (12 March 2020): [accessed 15 December 2021]. HM Treasury has published a consultation assessing the appropriate regulatory approach to stablecoins: HM Treasury, UK regulatory approach to cryptoassets and stablecoins: Consultation and call for evidence (January 2021): [accessed 15 December 2021]
75 ‘Down the rabbit hole: The promise and perils of decentralised finance’ The Economist (18 September 2021): available at: . See also, (Georges Elhedery).
77 (Simon Gleeson)
78 Written evidence from Positive Money ()
79 (Patrick Honohan)
80 Agustín Carstens, speech on Regulating big tech in the public interest, 6 October 2021: [accessed 15 December 2021]. See also, Bank for International Settlements, Central bank digital currencies: financial stability implications (September 2021): [accessed 15 December 2021].
81 Written evidence from Dr John Hawkins (. See also, ) (Prof Darrell Duffie), ‘Official Monetary and Financial Institutions Forum Fed Week Financial stability Session’, Eric Rosengren, Federal Reserve Bank of Boston (25 June 2021): available at . Furthermore, in July 2021 Fitch, a ratings agency, said that credit markets could be destabilised in the event of a run to convert stablecoins into traditional money. See, Fitch, ‘Stablecoins Could Pose New Short-Term Credit Market Risks’, (1 July 2021): [accessed 15 December 2021].
82 NYS Attorney General, ‘Attorney General James Ends Virtual Currency Trading Platform Bitfinex’s Illegal Activities in New York’, (23 February 2021): [accessed 15 December 2021]
83 Commodities Futures Trading Commission, ‘CTFC Orders Tether and Bitfinex to Pay Fines Totaling $42.5 Million’, (15 October 2021): [accessed 15 December 2021]
86 (Simon Gleeson)
88 (Prof Darrell Duffie)
89 Bank for International Settlements and International Organisation of Securities Commissions, Application of the Principles for Financial Market Infrastructures to stablecoin arrangements (6 October 2021): [accessed 15 December 2021]
90 Sir Jon Cunliffe, speech on Is ‘crypto’ a financial stability risk?, 13 October 2021: [accessed 15 December 2021]
91 (Andrew Bailey)
92 Bank of England, Central Bank Digital Currency: opportunities, challenges and design (12 March 2020): [accessed 15 December 2021]
94 (Simon Gleeson)
95 (Prof Duffie). In contrast, Dr Asgerdur Petursdottir, Dr Cyril Monnet and Dr Mariana Rojas-Breu, academics exploring the effect of CBDCs on the financial sector, told us that the introduction of an interest-bearing CBDC could promote economic activity and discipline commercial banks, because banks would need to ensure that bank deposits are as valuable to depositors as CBDC. See, written evidence from Dr Asgerdur Petursdottir, Dr Cyril Monnet and Dr Mariana Rojas-Breu ().
96 Bank for International Settlements, Central bank digital currencies: foundational principles and core features (9 October 2020): [accessed 15 December 2021]. See also, written evidence from Ripple (. )
99 (Patrick Honohan)
100 (Prof Eswar Prasad)
101 (Sir Jon Cunliffe)
102 (Andrew Bailey)
103 (Natasha de Teran)
104 Jiaqi Li, Swiss National Bank, ‘Predicting the Demand for Central Bank Digital Currency: A Structural Analysis with Survey Data’, (18 November 2021): . See also, Bank for International Settlements, Central bank digital currencies: financial stability implications (September 2021): [accessed 15 December 2021]. Other characteristics affecting likely demand include the extent to which transactions are private, their cost and ease of use, and the design features of the wallets in which they are stored. SICPA, a company that provides security inks for currencies and sensitive documents, told us that the perception of safety may make CBDCs attractive, particularly to businesses with holdings above insured deposit limits. See, written evidence from SICPA ().
105 Jiaqi Li, Swiss National Bank, ‘Predicting the Demand for Central Bank Digital Currency: A Structural Analysis with Survey Data’, (18 November 2021): . See also, Bank for International Settlements, Central bank digital currencies: financial stability implications (September 2021): [accessed 15 December 2021]. The Bank of England has considered an ‘illustrative scenario’ in which about 20% of household and corporate deposits migrate to CBDC owing largely to non-financial factors such as safety and convenience. See, Bank of England, ‘New forms of digital money’, (7 June 2021): [accessed 15 December 2021]
106 These figures could be lower if a higher proportion of cash is exchanged for CBDC instead of bank deposits.
107 Bank for International Settlements, Central bank digital currencies: financial stability implications (September 2021): [accessed 15 December 2021]
108 Written evidence from HSBC ()
109 Written evidence from Barclays (). See also, written evidence from EY (). According to the Bank of England, wholesale funding for banks comes in many forms and there is a wide range of types of investors that provide it. A bank may receive unsecured deposits from other banks, large corporates, pension funds, insurance companies and other financial market participants. See Bank of England, Bank funding costs: what are they, what determines them and why do they matter? (2014): [accessed 15 December 2021]
111 (Patrick Honohan)
112 See, Economic Affairs Committee, , (1st Report, Session 2021–22, HL Paper 42).
113 John Whittaker said that the Bank of England’s stated desire to reduce its stock of Government debt and the sensitivities of the state routinely intervening in the corporate debt market makes these options undesirable.
114 Written evidence from John Whittaker ()
115 Bank for International Settlements, Central bank digital currencies: foundational principles and core features (9 October 2020): [accessed 15 December 2021]
116 (Prof Eswar Prasad)
117 (Natasha de Teran). See also, (Georges Elhedery).
118 (Patrick Honohan)
119 Written evidence from John Whittaker ()
120 (Sir Jon Cunliffe)
121 (Andrew Bailey)
122 Bank for International Settlements, Central bank digital currencies: foundational principles and core features (9 October 2020): [accessed 15 December 2021]
123 Written evidence from Redfield & Wilton Strategies ()
125 Bank of England, Central Bank Digital Currency: opportunities, challenges and design (12 March 2020): [accessed 15 December 2021]
126 (Prof Eswar Prasad)
127 (David Birch)
128 (Natasha de Teran)
129 Bank of England, Central Bank Digital Currency: opportunities, challenges and design (12 March 2020): [accessed 15 December 2021]
130 Department for Digital, Culture, Media & Sport, Digital identify and attributes consultation (19 July 2021): [accessed 15 December 2021]
131 (Andrew Bailey)
132 (Andrew Bailey)
133 (John Glen MP)