For over 300 years, the Bank of England has issued banknotes carrying the pledge, “I promise to pay the bearer” and the value in pounds sterling of the note.
This legal commitment has long underpinned the heart of finance because commercial banks are required to be able to convert customers’ money into physical cash at all times, thereby tying these private providers of money and payments systems into the central bank’s orbit.
But the use of cash is dwindling, undermining this central feature of the financial system and leading the BoE to fret that notes and coins might become less relevant in future. While there is little evidence that volatile cryptocurrencies such as bitcoin are attracting investors as an alternative to sterling, there is a fear that the costs of transactions in sterling might leave the currency vulnerable to stablecoins — digital currencies pegged to an external reference such as the dollar, or even digital currencies issued by foreign central banks.