Sir Jon Cunliffe, a Bank of England Deputy Governor, has warned that cryptocurrencies could dry up the supply of credit through the banking system, which could have “profound economic consequences.”
According to Reuters, Sir Jon Cunliffe warned during a speech at the London School of Economics that a new wave of technological developments enabling users to transact cryptocurrencies could become mainstream.
Specifically referring to stablecoins such as Facebook’s proposed Libra cryptocurrency, Cunliffe added it’s possible these could see people move money from their bank accounts to wallets provided by other firms. The Bank of England Deputy Governor added:
In such a world, and depending how and whether stablecoins were backed with other financial assets, the supply of credit to the real economy through the banking system could become weaker or indeed disappear. That would be a change with profound economic consequences.
The Bank of England has, as previously covered, warned that Libra and other new forms of payment need to be carefully considered before launching. Mark Carney, Governor of the Bank of England, warned last year that the Libra Association couldn’t just “learn on the job” and had to be “rock solid from the start or it’s not going to start.”
Per Cunliffe, authorities need to “ensure that any stablecoins used as money meet the standards applied to commercial bank money,” and they pass other tests that will prevent their use in anti-money laundering and protect its users’ data.
In October 2019, the Bank of Internal Settlements (BIS) released a report on the potential impact of global stablecoin, highlighting how these cryptocurrencies could “increase vulnerabilities in the broader financial system.”
The document suggested deposits at banks could decline, forcing the institutions to increase dependence on costly and volatile sources of funding, while also potentially reducing their profitability. The BIS has, in the past, also argued that cryptocurrencies “promise a lot, but don’t always deliver.”