The Bank of England outlined a notably progressive position on digital innovation this week, with Executive Director Sasha Mills saying the institution would be “open minded” about using stablecoins for wholesale payments. The stance contrasts sharply with a BIS report last week that classified stablecoins as unsound money.

Mills emphasized that financial stability remains paramount, but a recent legal change gave the Bank a secondary innovation objective, requiring a more balanced approach. She said the Bank wants to maintain “same risk, same regulatory outcome and give space to innovators to compete to deliver solutions.”

Additionally, she acknowledged that current market infrastructures need upgrading. “At some point, it makes more sense to build new structures than try to modify the existing ones,” she said. “In our view, this point in time is fast approaching, if not already here.”

Significant shifts on stablecoin policy

The Bank has made substantial changes to its stablecoin position. The biggest development was this week’s openness to stablecoin usage in wholesale markets, including potential use in the Digital Securities Sandbox. However, Mills still expressed a preference for using central bank money for wholesale settlement.

For retail use, the Bank has softened its stance considerably. A 2023 discussion paper proposed that large stablecoin issuers keep all reserves at the central bank without receiving interest. After feedback that this business model was unviable, the Bank will now allow some reserves to be invested in high quality assets like government bonds.

The institution remains concerned about sudden mass adoption causing bank deposit flight and undermining credit provision. It is considering transitional holding limits of £10,000 to £20,000 for consumers and £10 million for businesses.

For wholesale settlement, the Bank is developing a synchronization system similar to Germany’s Trigger solution, enabling DLT transaction settlement through the main RTGS payment system. It recently launched a DLT Innovation Challenge with the BIS, and Mills welcomed UK work on tokenized deposits, presumably referring to the Regulated Liability Network project.

The Bank expects to see a “mixed ecosystem” where new and old financial structures coexist, possibly permanently. Mills stressed the need for interoperability to avoid liquidity fragmentation, noting it would be of “limited benefit to have bifurcation of liquidity where assets exist within walled gardens of old and new structures.”

The Director said the Bank is seeing credible solutions using public blockchain networks as connectivity layers “without compromising security and regulatory requirements of private systems, such as on chain financial market infrastructures.”

She concluded that “it is time to move away from talking about potential and one off demonstrations of the technology, and for all of us to start working together to deliver a new generation of the financial system that is befitting of London’s place as the heart of the global financial system.”