Cryptocurrencies could threaten to upset financial stability if they encourage swathes of households to pull of out utilising deposits from commercial banks, according to the Bank of England.
The bank modelled a potential scenario where around a fifth of household and non-financial corporate deposits made the shift towards cryptocurrencies instead, which included a central backed ‘stable coin’ currency.
“There is a strong case for considering the value of transitional arrangements that aim to ensure that new forms of digital money can emerge without threatening monetary and financial stability,” the Bank said, adding that “the banking sector could prove unprepared to withstand large outflows of deposits”.
The cryptocurrency craze has gained pace at an astronomical speed in the last 12 months and global organisations as well as corporate treasuries are quickly trying to cash in.
A lot of big global institutions have been forced to consider the introduction of regulated cryptocurrencies, or ‘stablecoins’.
The UK government has already adopted the idea of a stablecoin, the Treasury and the Bank of England recently launched a ‘central bank digital currency’ (CBDC) taskforce in order to explore the launch of a digital currency underpinned by the same blockchain technology used by cryptocurrencies.
In April Rishi Sunak, the chancellor, asked the Bank of England to explore a CBDC.
CBDC are cryptocurrencies that are backed by a reserve asset such as gold or the dollar for example.
These are essentially the quickest way of making paying with crypto more accessible. Stablecoins are the financial industry’s answer to the volatility of the crypto market.