Bank of England Governor Andrew Bailey has issued a warning against allowing major banks to issue their own stablecoins, highlighting potential risks to financial stability and the lending capacity of banks. Bailey's concerns reflect a broader debate about the future of digital currencies and their impact on the traditional financial system.
Bailey has expressed a preference for tokenized deposits, which are digital versions of traditional money, over privately issued stablecoins. He argues that stablecoins could undermine the core functions of modern banking, particularly monetary control and credit creation. The Governor voiced his concern that if stablecoins gain traction and draw money away from the banking system, banks would have less capacity to lend. He also cautioned that widespread adoption of stablecoins by financial institutions could lead to disintermediation, liquidity imbalances and increased risk of sudden withdrawals, especially during market stress.
Furthermore, Bailey cautioned that the introduction of private stablecoins could complicate the "singleness of money", which ensures all forms of money in an economy are interchangeable and backed by a common framework. He also raised concerns about the potential for stablecoins to circulate outside central oversight, which could complicate cross-border financial stability measures. He has urged central banks to reassess their roles in the face of payment innovation and cross-border liquidity risks, noting that unregulated stablecoins could lead to fragmented monetary systems and weaken policy tools.
Bailey's stance puts him at odds with the direction being taken by the U.S. under President Trump, which has passed stablecoin legislation setting up regulatory rules for cryptocurrencies pegged to the dollar. This divergence highlights a growing policy divide on digital money between the UK and the US. The US House of Representatives and Senate are set to debate various crypto-related bills, including the GENIUS Act, which aims to facilitate the issuance of stablecoins by companies and banks.
The Governor's concerns are not isolated. Other central bankers have echoed similar worries, calling for regulations on stablecoin companies akin to those governing banks. These concerns include the risk of stablecoin crashes potentially triggering fire sales of underlying assets, and the possibility of significant sums of money changing hands outside the formal banking system, which could enable illicit activities like money laundering.
Bailey also hinted that he is not in favor of the UK adopting a central bank digital currency (CBDC), also known as the digital pound. He stated that it would be more sensible for the UK to move toward digitizing deposits instead of issuing a CBDC in response to private sector stablecoins. This approach signals a preference for integrating digital innovation within the existing financial framework rather than introducing new, potentially destabilizing assets.
As the new chairman of the Financial Stability Board, an international financial regulator, Bailey's views carry significant weight. His leadership suggests a potential clampdown on the proliferation of stablecoins, a major sector in the crypto market. His remarks underscore the need for regulatory frameworks to ensure that stablecoins meet high standards for security, liquidity, and legal clarity before they can be integrated into official reserves.
