The Bank of England’s Financial Policy Committee (FPC) has raised alarm over the increasing risks associated with stablecoins and unbacked cryptocurrencies. During meetings on April 4 and April 8, the FPC noted a significant rise in stablecoin and crypto activity over the past year. The committee focused on the need for stablecoin reserves to be both high-quality and liquid to avoid destabilizing the financial markets, especially if offshore sterling-denominated stablecoins gain popularity.
The FPC also warned that the use of foreign-denominated stablecoins could lead to currency substitution, weakening domestic monetary systems. With stablecoins being used beyond crypto transactions, they pose new risks for cross-border and off-chain settlements. Although unbacked crypto assets haven’t caused systemic issues yet, their growing ties to traditional finance warrant close monitoring.
To mitigate these risks, the FPC stressed the importance of continued surveillance and stronger global cooperation, endorsing the Financial Stability Board’s regulatory framework for stablecoins and unbacked crypto assets. Conflicts of interest were transparently disclosed, with members Jon Hall and Liz Oakes recusing themselves due to professional affiliations.
These discussions occur amid concerns from UK regulators about younger investors choosing crypto over traditional investments, which FCA chief Nikhil Rathi views as risky. The FCA advocates for more savings in long-term financial instruments, noting the UK’s lower direct share ownership rates compared to other countries.
Approximately 12% of British adults, or seven million people, have engaged with crypto, prompting regulators to focus on stablecoin regulation within a broader context of financial stability challenges. These include geopolitical tensions, US trade tariffs, and potential corrections in equity and commodity markets. The FPC highlighted vulnerabilities like increased leverage among hedge funds and private equity reliance on market-based funding, which could exacerbate financial pressures if refinancing conditions tighten.
Despite these challenges, UK households and corporations remain resilient, supported by low arrears and manageable debt ratios. This highlights the FPC’s intensified focus on crypto assets, particularly stablecoins, in its financial stability agenda.
