BOE Champions Tokenized Deposits to Counter Stablecoin Risks

The Bank of England (BOE) has signaled a strategic shift in its approach to stablecoins, urging banks to prioritize tokenized deposits over private-sector stablecoins or central bank digital currencies (CBDCs) to mitigate risks to financial stability. Governor Andrew Bailey, in a recent interview with The Times, warned that stablecoins-despite their growing adoption for cross-border transactions and remittances-pose systemic risks by diverting liquidity from traditional banking systems and creating unregulated parallel financial channels. Bailey emphasized that tokenized deposits, which represent digital claims on traditional bank reserves, offer a safer alternative by maintaining integration with established banking infrastructure while enabling real-time, programmable payments.

Bailey's stance reflects concerns over the regulatory vacuum surrounding stablecoins, which currently lack the oversight applied to traditional financial instruments. He argued that tokenized deposits could digitize payments without replicating the volatility and compliance challenges of cryptocurrencies like Bitcoin. "I would much rather [banks] go down the tokenized deposit route and say, how do we digitize our money, particularly in payments," Bailey stated, contrasting this approach with the risks of CBDCs or private stablecoins. This position aligns with the BOE's broader caution toward crypto assets, as Bailey reiterated his view that Bitcoin "is not money" and lacks the functional attributes of traditional currency.

The divergence in global regulatory approaches further underscores the BOE's position. The U.S. is advancing toward a stablecoin-centric framework, with legislative debates focusing on enabling financial institutions to issue fiat-backed digital currencies. Conversely, the European Union is prioritizing CBDC development, leaving tokenized deposits as an underexplored option. Bailey noted that neither region is actively pursuing tokenized deposit systems, despite their potential to harmonize digital and traditional financial ecosystems. This regulatory fragmentation complicates the adoption of standardized solutions, though the BOE remains engaged in international discussions through the Financial Stability Board and other forums.

Market data highlights the urgency of addressing stablecoin risks. The stablecoin market has grown to a $258 billion capitalization, with Ethereum-based stablecoins alone attracting over 750,000 unique weekly users. While this growth reflects stablecoins' utility in remittances and cross-border payments, regulators warn of systemic vulnerabilities, including potential money laundering risks and disruptions to monetary policy. Bailey joined calls for stricter oversight, advocating for rules that ensure stablecoins are "safe and reliable" as they increasingly function as transactional media.

The BOE's advocacy for tokenized deposits aligns with broader industry trends. Major banks, including BNY Mellon and JPMorgan, are experimenting with blockchain-based payment systems to modernize legacy infrastructure. Tokenized deposits, unlike stablecoins, are fully backed by commercial bank reserves, enabling instant settlements while preserving regulatory oversight. These initiatives aim to reduce transaction costs and reconcile the speed of digital transactions with the compliance requirements of traditional finance.

As the financial sector navigates the transition to digital assets, the BOE's emphasis on tokenized deposits signals a preference for solutions that balance innovation with stability. By steering banks away from unregulated stablecoins and toward digitized traditional money, the BOE seeks to safeguard the integrity of the financial system while accommodating evolving technological demands. This approach, however, hinges on global regulatory alignment and the development of interoperable standards-a challenge that remains central to the future of digital finance.

Source: [1] Bank of England Governor Warns Banks Against Stablecoins, Pushes for Tokenized Alternatives (https://www.cointribune.com/en/bank-of-england-governor-warns-banks-against-stablecoins-pushes-for-tokenized-alternatives/)