Bank of England gov warns digital pound must not undermine commercial banks

Bank of England Governor Andrew Bailey expressed skepticism about the role of central bank digital currencies (CBDCs) in financial stability, emphasizing that central banks must maintain control over monetary transmission through the banking system.

Speaking at the University of Chicago Booth School of Business in London on Feb. 11, Bailey reinforced that while financial markets are evolving, the principles underpinning money issuance and liquidity must remain intact.

Bailey highlighted that non-bank financial institutions (NBFIs) are playing an increasingly significant role in global finance, prompting central banks to adapt their risk management frameworks. However, he made clear that this shift does not warrant broadening access to central bank money beyond traditional banks.

“There is no rationale for standing facilities for non-banks as they do not create money.”

Bailey said, signaling that the introduction of a digital pound would not alter the BoE’s core approach to monetary stability.

Undermining commercial banks

With several major economies exploring CBDCs to modernize payments and financial infrastructure, Bailey emphasized that any digital currency issued by the Bank of England must preserve the existing financial framework.

Bailey confirmed that the Bank of England is still studying the feasibility of a digital pound, working in collaboration with the UK government. However, he stressed that while digital technologies offer new possibilities for payments, the decision to introduce a CBDC must be based on clear economic benefits rather than speculative trends.

Bailey said:

“We must have it if it’s proven that we need it.”

While he acknowledged that a digital pound could serve as an additional payment option, he warned against undermining the fundamental role of commercial banks as intermediaries.

Bailey also stressed that the concept of central bank liquidity must remain bank-centric. He reinforced that a CBDC would not be intended to replace private-sector financial institutions but rather complement the system.

According to Bailey:

“The standing provision of liquidity to support the so-called singleness of money goes only to the banks.”

In January, the Bank of England announced plans to launch a “Digital Pound Lab” later this year as part of an exploratory phase to determine the potential design and use cases of a UK CBDC.

Bailey’s stance suggests that while the Bank of England remains open to digital currency advancements, it will not rush to introduce a CBDC or expand stablecoin adoption without comprehensive regulatory safeguards in place.

Stablecoins must meet ‘high bar’

Bailey also discussed Bitcoin (BTC) and stablecoins during his speech. He characterized Bitcoin as solely a speculative asset, while acknowledging that stablecoins could serve some monetary functions.

However, he warned that stablecoins must meet a “high bar” of regulation if they are to operate within the payments ecosystem.

Bailey’s remarks come amid growing discussions on stablecoin regulation, particularly as the Bank of England and the UK government continue to assess their role in digital finance. He reiterated that while stablecoins are backed assets, they also exhibit characteristics similar to mutual funds, making them more opaque than traditional money.

Bailey said:

“I think we will have to set a high bar there because the expectations are that people using things for payments are appropriately set like money.”

His comments follow recent global shifts in regulatory approaches to crypto assets. Bailey acknowledged that the election of pro-crypto US President Donald Trump could reshape global regulatory dynamics but noted that it remains unclear what specific reforms his administration will pursue.

According to Bailey:

“The Biden administration, particularly the SEC, had got into a situation where it couldn’t get a regulatory framework and was using action through the courts. That was becoming more challenging, frankly. So there is a gap there in terms of having a consistent regulatory framework, but we don’t know what that’s going to be.”