A combination of central bank “systemic” digital currencies and stablecoins could significantly alter central banks’ implementation and control of monetary policy and the size and composition of their assets and liabilities.

That’s according to Andrew Hauser, executive director of markets at the Bank of England. Hauser made that argument as part of a speech he gave at the Federal Reserve Bank of New York on Wednesday.

The magnitude of the effects “will be highly dependent on the eventual design of any systemic digital currency,” Hauser said. He also clarified that digital currencies pose no redline risk to central bank balance sheets. Nonetheless, he argued that central bankers should start preparing for the “significant implications” that central bank digital currencies (CBDCs) and stablecoins will have for their balance sheets by embedding answers to these in their boxes. operational tools.

Central banks – as the sole issuer of fiat money – generally control the money supply of a national economy using three main devices: changing interest rates, regulating commercial banks (by setting capital requirements and reserve) and act as a lender of last resort. The money issued is considered a liability on the balance sheet, which can be bought back or sold to commercial banks as needed.

Hauser explained how CBDCs and other digital currencies could disrupt this system by changing the privileged relationship between central and commercial banks. Under certain conditions, digital currencies could increase competition for credit, reduce the amount of deposits held in commercial banks (and therefore reserve rates) and challenge the ability of central banks to serve as lender of last resort.

Set in the shadow of the collapse of stablecoin TerraUSD, Hauser’s speech highlighted how these systems could be regulated. He clarified that in the UK, the Bank of England recommends that any stablecoin reaching systemic size – defined as having the potential to scale rapidly and become widely used for payments – should meet the standards expected of a stablecoin. commercial bank, including a rigorous central. banking supervision, strong legal claims and transparency about the assets used to back its currency.

This implies that stablecoins, even if operated by private companies, would be forced to integrate into the monetary system governed by central banks, thus functioning as a de facto form of state-guaranteed liability.

If adopted, CBDCs would be the first new liability used by central banks in centuries. “The dog may be old,” Hauser said, “but he can still perform new tricks!”

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