The role of holding limits for sterling-denominated systemic stablecoins and a potential digital pound

Core Insights - The Bank of England aims to support innovation in payments through the introduction of digital money while ensuring the stability of the UK monetary system [1][12] - The consultation paper outlines a proposed regulatory regime for systemic stablecoins (SSCs) and the potential digital pound, which would be issued by the Bank and fully backed by central bank deposits and UK government debt securities [2][13] - The paper highlights the risks of reduced lending to businesses and households due to the introduction of digital money, particularly during economic stress [3][14] Financial Stability Considerations - The existence of digital money could lead to bank disintermediation, where households and businesses switch deposits to digital forms, especially during banking stress [4][14] - The paper identifies two scenarios for disintermediation: transition to steady state and stress scenarios, focusing on the latter [15][20] - Holding limits are proposed as a transitional safeguard to mitigate financial stability risks associated with digital money adoption [19][22] Methodology and Scenarios - A hypothetical 'severe illustrative stress' scenario is developed to assess the impact of deposit outflows on banks' liquidity and lending capabilities [6][30] - The analysis includes metrics such as the number of banks falling below 100% Liquidity Coverage Ratio (LCR) and the demand for central bank lending [8][35] - The model assumes significant outflows, with uninsured deposits experiencing higher withdrawal rates compared to insured deposits [31][34] Holding Limits Analysis - Different levels of holding limits are evaluated, ranging from £5,000 to £20,000 for individuals and £1 million to £100 million for businesses [7][49] - The introduction of holding limits is shown to reduce the number of firms at risk of falling below 100% LCR and the demand for central bank lending [55][59] - Without holding limits, the potential demand for central bank lending could rise to approximately £250 billion, indicating a significant risk to financial stability [8][49] Usability Considerations - The paper discusses the importance of usability for digital money, balancing financial stability risks with the need for households and businesses to effectively use digital money [9][60] - Analysis shows that higher holding limits could enhance usability, allowing a greater share of payments to benefit from innovations offered by digital money [9][61] - The usability of digital money is measured through the ability to receive income, make payments, and conduct high-value transactions [60][72] Policy Implications - The analysis informs the Bank's policy judgments on holding limits, emphasizing the need for a balance between financial stability and usability [78][81] - The calibration of limits will involve policy judgments that extend beyond financial stability risks, ensuring limits are both prudent and practical [11][78] - The potential impact of business limits on the integrity of money markets, such as SONIA, is also considered [82][84]