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In the cryptocurrency economy, the supply of credit through the banking system could disappear, warned Bank of England Deputy Governor Sir Jon Cunliffe. That would be a change with “profound economic consequences,” he added, emphasizing the risks from Facebook’s Libra project and global stablecoins.

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Bank of England Deputy Governor Sir Jon Cunliffe warned on Friday that bank lending could dry up in the cryptocurrency economy. In a speech given at the London School of Economics, he explained that there is “a new wave of technological development that enables the transactional use, not of central or commercial bank money, but rather a new form of asset, so-called ‘crypto-assets.'”

Cunliffe, who was previously a British envoy to the European Union, proceeded to talk about stablecoins. “There is certainly the possibility with stablecoins linked to large technology and social media platforms that it could become mainstream for people to move from holding all or much of the money now in ‘current accounts’ at banks to holding it in ‘stablecoin’ in virtual ‘wallets’ provided by non-banks,” the Bank of England’s deputy governor for financial stability described, adding:

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 previously warned about Libra and other new forms of payment which they say must be considered carefully before they are allowed to launch. According to Cunliffe, “Authorities needed to ensure that any stablecoins used as money meet the standards applied to commercial bank money and passed other tests in areas such as competition, data protection and anti-money laundering,” Reuters conveyed.

Many governments have been on alert regarding Libra. Last week, the G20 finance ministers and central bank governors issued a statement after their first meeting this year addressing stablecoins. “We reiterate our statement in October 2019 regarding the so-called ‘global stablecoins’ and other similar arrangements that such risks need to be evaluated and appropriately addressed before they commence operation, and support the FSB’s [Financial Stability Board] efforts to develop regulatory recommendations with respect to these arrangements,” the statement reads. Global stablecoins are stablecoins that have the potential to achieve scale from launch.

The Bank of International Settlement (BIS) released a G7 Working Group research paper in October last year entitled “Investigating the impact of global stablecoins.” It highlights how these coins could “increase vulnerabilities in the broader financial system” through various channels.

Firstly, the paper suggests that retail deposits at banks may decline if users hold global stablecoins permanently in deposit-like accounts, resulting in banks increasing their dependence on more costly and volatile sources of funding. Secondly, the “easy availability of global stablecoins may exacerbate bank runs in times when confidence in one or more banks erodes,” the report details. “Third, if new financial intermediaries in the global stablecoin ecosystem captured a significant fraction of financial intermediation activity, this could further reduce bank profitability, potentially leading banks to take on more risks or to contract lending to the real economy.”

Do you think cryptocurrency will kill bank lending? Let us know in the comments section below.

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Images courtesy of Shutterstock and the Bank of England.

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