Stablecoins, cryptocurrencies tied to the value of an underlying asset like the U.S. dollar, will likely soon face regulatory pressure as central banks and other regulatory agencies notice their ascent.
Andrew Bailey, the incumbent Governor of the Bank of England, announced the central bank's intent to regulate stablecoins in a speech on September 3rd, according to a transcript of Andrew Bailey's latest address. He specifically cited concerns that stablecoins are currently not subject to the same regulation measures as traditional payment rails.
In his address, Bailey noted that “many earlier forms of crypto-assets, such as bitcoin, have proved unsuitable for widespread use in payments, stablecoins, and particularly global stablecoins, aim to do just that.” He did not mention any stablecoin by name, but brought attention to "global stablecoins," presumably in reference to Libra and others like Tether USDT.
Due to their potential to "reduce frictions in payments" and "increase convenience" in transactions, Bailey notes that stablecoins must be regulated with "equivalent standards to [payment means] that are in place today."
The Bank of England head noted that first and foremost, the security of the funds backing each coin is crucial as stablecoins should hold parity to the underlying asset at all times. Bailey noted that “there should be comprehensive domestic and international regulation and supervision” for stablecoins.
Speaking to privacy concerns, Bailey further cited the “widespread mis-use of [user] data in the past” and noted that while the enhanced financial data that can be collected through digital payments may aid the “detection and prevention of financial crime [...] this must be balanced with the risk of surveillance into private financial matters.”
Bailey's comments come after notable supernational groups have targeted stablecoins as potential threats to certain aspects of the global financial system.
The Financial Action Task Force (FATF) published a 32-page report on "so-called stablecoins" in July. The agency, focused on developing policies to combat money laundering, has representatives from a majority of the world's countries.
Representatives of the Group of 7, an intergovernmental committee that is formed by the United States, Japan, United Kingdom, Germany, Canada, Italy, France, released a similar report in October 2019 to address the threat of Libra.
Like Bailey, the representatives of these two groups see potential in stablecoins, but also note that they currently lack the proper regulatory framework to be commercially viable and secure.
The FATF report specifically named seven stablecoins, which are: Tether, USD Coin, Paxos, TrueCoin, Dai, Libra, and Gram.
Libra has already adjusted its plans due to regulatory pressure, watering down the plans to attempt to decentralize the network and its stablecoins. Other stablecoin projects, however, remain relatively unregulated.
It's worth noting that Andrew Bailey is not known to be a fan of Bitcoin.
The central banker, during his time as the head of the Financial Conduct Authority (FCA), told the BBC in late 2017 that Bitcoin makes little sense as an investment because it is "not a currency" and is not backed by any central bank:
"It's not a currency, it's actually not regulated in its bitcoin form. It's a very volatile commodity in terms of its pricing. If you look at what has happened this year, I would caution people. If you want to invest in bitcoin be prepared to lose your money - that would be my serious warning."
Bailey also opined that because Bitcoin is pseudonymous, he has concerns that it is used to facilitate crimes such as money laundering or terrorist financing.
Prior to his appointment to the central bank of the U.K., he reiterated in a March hearing that one buying Bitcoin should be "prepared to lose all their money."