What is a stablecoin?
A stablecoin is a form of digital asset that can be used to make payments.
It isn't like the cash you carry, or the money in your bank which is held on a central record by your bank. It is an asset that could be created, for example, by a technology company, rather than by a bank.
Stablecoins are backed by a specified asset or basket of assets which they use to maintain a stable value against that asset. This is usually a country’s currency, such as the US dollar. This makes stablecoins different from cryptoassets which tend not to have assets as backing and so, are more volatile.
Right now, stablecoins are mainly used for:
- buying or selling cryptoassets
- making payments across a country’s border (known as ‘cross-border payments’)
An example of a cross-border payment is when someone sends money to family or friends in another country. But, because stablecoins have a stable value, people may start using them more to pay for a wider range of things.
Is Bitcoin a stablecoin?
While Bitcoin is a type of cryptoasset, it is not a stablecoin.
With cryptoassets, like Bitcoin, their value tends to move up and down a lot in a short space of time. That is because they are not backed by real assets. This makes them a risky option to use. It is one reason why cryptoassets like Bitcoin are not widely used to pay for things.
There's another big difference between stablecoins and certain cryptoassets including Bitcoin. Bitcoin is issued by a computer code on a network that is not controlled by any particular individual or company.
On the other hand, most stablecoins are issued by a company. The issuer aims to make sure the value of stablecoins remains linked to something more stable in value, such as a country’s currency.
How does a stablecoin work?
A stablecoin typically goes through a few stages before someone can use it.
Each stage may involve a different company.
First, a company issues a stablecoin. For every stablecoin it issues, the company also holds the same value in a country’s currency. This is how the company links the value of its stablecoin to the value of something else.
Then the stablecoin is issued to the broader public through another type of infrastructure known as a ledger. This records the transactions and who owns the stablecoin. It also transfers the value of stablecoins between individuals.
The value of the stablecoin issued onto the ledger is linked to the stable assets that the issuer holds. This means as soon as a coin-holder wants to exchange their stablecoins for, say, money in their existing bank account, they can do that easily and without loss.
Finally, another company provides a digital wallet which can be used on a smartphone or other pieces of hardware and software. The owner of the stablecoins can use this wallet to essentially store, send and receive their coins. It gives them a way to access their coins.
People can also decide to invest their stablecoins to make a return on them. They can go on platforms called ‘exchanges’ to do that.
Are there stablecoins in the UK today?
Some people in the UK use stablecoins which are linked to the US dollar or other currencies. At the moment a small number of stablecoins are linked to the UK pound.
The Bank of England wants companies that issue stablecoins used mainly for payments, to issue them in a safe way.
That is why we are working with other UK financial regulators and together we have proposed rules on stablecoins.
Our rules would only apply to stablecoins that are widely used for payment in the UK. Right now, there are no stablecoins like this.
What would the rules on stablecoins be?
We want people to have confidence in the different ways they pay for things. It’s an important way to avoid large disruption to the UK’s financial system and economy.
Our proposed rules are to regulate stablecoins that would become widely used for payments in the UK.
The regulation aims to make sure stablecoins always maintain a stable value, so people who hold them can get their money back. We also want to make sure people can pay using stablecoins without disruption. And we want to make sure stablecoin wallets are safe to use and respect people’s legal rights.
Is a stablecoin the same thing as a CBDC?
Will there be a CBDC in the UK?
The Bank of England and HM Treasury have seen that the way people pay for things is changing. People are not using cash as much as they used to. Digital payments are becoming more common.
For these reasons, we are looking closely at the idea of a central bank digital currency for the UK.
No decision has been made yet on whether to launch a CBDC in the UK, but we think it is likely to be needed in the future. If we introduced one, we’d call it the digital pound.
