Bank of England has warned that the increasing popularity of digital currencies and the ever-increasing trade practices may lead to financial instability in England. As more traders are drawn towards the cryptocurrency market, the number of withdrawals of money from the banks has increased significantly, which has led to the country facing economic instability. The bank of England has mentioned Stablecoins as a threat to the economy as it is a cryptocurrency similar to Bitcoin and is much more resistant to market fluctuations.
Unlike other digital currencies, Stablecoin does not suffer from the severe price movements throughout the day as they are built to move alongside the government-backed currencies and values like euro or dollar, and even commodities like gold, that have proven to be less volatile. Diem, a digital currency backed by Facebook, is in the works and plans to offer Stablecoin like services by linking it to dollars, euros, as well as many other major currency values.
The bank published a research paper, which shows the impact of the widespread adoption of digital currencies. As more and more people are taking out their finances and investing in new tokens of trade, the high-street banks are having a hard time maintaining their balance and stability in operations. The banks would lose their key funding and will lead to increased interest rates on loans and the availability of loans in the market. The interest rates pose as key tools to The Central Bank in managing inflation and economic growth in the long run.
It is an important thing to note that the Bank of England is looking to launch its digital currency named “Bitcoin” by Chancellor Rishi Sunak. They are still in the process of calculating the risks involved with introducing digital currencies and are unsure if they will be launched for the public anytime soon. Some economists believe that Bank’s own digital currency can help ensure a much more sustainable and democratic system growth amid the rapid growth of digital assets like cryptocurrencies worldwide. Others are looking at this step as a massively confusing way to move forward and believe that the banking and financial systems launching their digital currency will lead to major system shock, and adapting digital currencies to their business models will take a lot of time. This would result in open access to The Central Bank and its services, ultimately taking away all the unique benefits enjoyed by private financial institutions.