Bank of England Governor Warns Banks Against Issuing Stablecoins Due to Financial Stability Risks

Bank of England Governor Andrew Bailey has cautioned major banks against issuing their own stablecoins, highlighting the potential risks these digital assets pose to financial stability. Bailey expressed concern that stablecoins could divert funds from the traditional banking system, reducing the amount of money available for lending and potentially disrupting financial stability. This warning comes amid a global shift towards cryptocurrencies and digital assets, with stablecoins being seen as a potential alternative to traditional fiat currencies.

Bailey's concerns are rooted in the potential systemic risks that stablecoins present. He noted that these digital assets lack the protection and assurance typically provided with traditional bank deposits, which could destabilize credit arrangements and weaken the management of national currencies. The governor also cautioned that widespread adoption of stablecoins could decrease the capacity of central banks to steer monetary policy, as money may be diverted out of regulated banks.

Instead of issuing stablecoins, Bailey suggested that banks focus on developing tokenized deposits. These are digital representations of conventional money created by authorized financial organizations and retained within the banking system. Tokenized deposits are subject to the same guarantees as standard deposits, making them safer and easier to use. Bailey believes that tokenized accounts could help sustain digital innovation without undermining financial regulation, allowing banks to modernize payment systems while preserving control over the money supply.

Bailey's remarks come as global regulators take different approaches to crypto regulation. In the United States, lawmakers are preparing to pass legislation that would allow commercial banks to issue stablecoins under strict regulation. In contrast, the European Central Bank is focusing on launching its own digital currency. Bailey pointed out that neither the U.S. nor the ECB is prioritizing tokenized deposits, highlighting a growing divide in how global economies handle digital money. These differing approaches could affect financial cooperation in the years ahead.

Large banks, including JPMorgan, Citi, and the Bank of America, are currently considering the issuance of stablecoins. Regulators and central banks have shown interest in their plans, but Bailey, also Chair of the Financial Stability Board, is more cautious. He emphasized that stablecoins need to be highly regulated to avoid damaging the financial system. Regulators in various regions have issued new regulations to deal with the growth of stablecoins, indicating the increased impact of dollar-supported stablecoins and the need for global coordination in regulating digital currencies.

Bailey's warning is part of a broader effort by regulators to address the risks posed by cryptocurrencies and stablecoins. He has previously expressed concerns about the financial stability risks and potential threats to the nature of money that crypto assets pose. His comments serve as a call to action for regulators and policymakers to carefully manage the potential risks and benefits of stablecoins and other cryptocurrencies as the global shift towards these digital assets continues.