Bank of England: “We don’t think crypto assets are money, or a particularly good store of value”

At London Fintech Week, Cordelia Kafetz, Head of the Bank of England’s Fintech Hub made clear the central bank’s position on cryptocurrencies and fintech innovation.

“We’ve been doing a lot of thinking on crypto assets,” said Kafetz, “back in 2014, we published some bulletins saying that crypto assets didn’t pose a risk to our objectives. The price hike last year made us think again.”

“The Bank of England set up the Fintech Hub a few months ago to think about how the central bank can respond to the changing financial services – to mitigate risks and support innovation,” she said. “Our remit is to protect the people of the UK through monetary and financial stability. For that reason, we care about fintech and how it is providing for the needs of the end user.”

But, in terms of crypto assets and despite the price hike and crash of late 2017 as well as strong corporate investment in the sector, Kafetz does not believe crypto markets posed a threat to systemically important financial institutions: “That’s not to say there aren’t consumer or investor protection concerns and that’s where the FCA is now focusing. We’ve set up a taskforce in partnership with the FCA and the treasury to look at where regulation is needed in the crypto asset space.”

But throughout the session, Kafetz attempted to clarify the bank’s definition of cryptos.

“We don’t think crypto assets are money, or a particularly good store of value due to volatility. We also don’t see them as a medium of exchange yet. However, we distinguish between crypto assets and their underlying technology.”

When asked if this might mean the central bank would adopt a digital currency, Kafetz was quick to rebuff.

“Issuing a central bank digital currency is definitely not in the foreseeable future. What we mean by digital currency is everyone having access to central bank money, which is Sterling. Who and why would they use it? Crypto asset users either don’t want to use Sterling or they want to make a quick buck, so they wouldn’t use it.

“If everyone decided to use central bank crypto assets, I would bet it’s because they reckon it is safer than with their commercial bank which means that financial stability becomes problematic, as those commercial banks play a critical role in credit disintermediation and lending in the economy. The risks outweigh the benefits for a central bank digital currency.”

But Kafetz does not rule out greater use of fintech to innovate the central bank, in the case of crypto assets, separating the speculative asset from the underlying technology.

Among other areas, Kafetz spoke about the need to innovate the central bank’s real-time gross settlement system, currently settling 600 billion payments a day, approximately one third of the UK’s GDP.

“The real-time gross settlement system is 20 years old and we need to update it so that it’s fit for purpose. If distributed ledger technology comes along with a good use case, we could use that,” said Kafetz.

But as well as adopting new technology, the central bank can do more to encourage innovation within the UK’s current payments infrastructure as well as cross-border.

“The real-time gross settlement system was only accessible for banks, but we’ve recognised that it’s not just banks that need access so we opened up to non-bank payment services providers. Transferwise spoke yesterday about being the first to get access. It’s really important for innovation as they are no longer dependent on a commercial bank,” said Kafetz.

“We’re also working with the Bank of Canada and the Monetary Authority of Singapore to figure out how to take the friction out of cross-border payments.”

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