Bank of England Governor Warns of Private Stablecoin Risks to Financial System

Bank of England Governor Andrew Bailey has cautioned banks about the potential risks associated with private stablecoins, emphasizing that their widespread adoption could destabilize the entire financial system. Bailey expressed concerns that stablecoins could drain money from traditional banks, reducing their lending capacity and undermining the carefully regulated traditional banking system.

Bailey proposed "tokenized deposits" as an alternative solution. This approach involves digitizing traditional bank deposits, keeping digital payments within the existing banking framework rather than creating parallel systems. By doing so, Bailey aims to maintain financial stability while embracing the benefits of digital payments.

Bailey's warnings carry extra weight due to his leadership role at the Financial Stability Board (FSB), which began in July 2025. This position allows him to influence global stablecoin standards as the market experiences record growth, shaping international rules around digital currencies.

Bailey's stance contrasts with the approach of the Trump administration, which views stablecoins as strategic tools for maintaining dollar dominance worldwide. Treasury Secretary Scott Bessent argues that stablecoins can reinforce dollar supremacy by backing digital tokens with cash and short-term Treasury bills, potentially generating significant demand for US government debt.

Federal Reserve Chair Jerome Powell has also shifted his stance on stablecoins, now calling for regulation. This marks a change from his previous position that digital dollars would make stablecoins unnecessary. The administration's comprehensive strategy includes the GENIUS Act, which creates federal licensing for stablecoin issuers while requiring full reserve backing, providing the industry with the regulatory clarity it has long sought.

European officials view America’s stablecoin push with growing alarm. ECB President Christine Lagarde has previously warned that stablecoins risk undermining the capacity to conduct monetary policy and could lead to the privatization of money. The threat European leaders see is real, as dollar stablecoins gaining traction in domestic transactions could anchor Europe’s payment system to the US currency, reducing the euro’s role in European commerce.

The regulatory response to stablecoins reveals deep disagreements about digital asset policy. While the United States advances comprehensive federal legislation, the European Union implements restrictive measures that prioritize monetary sovereignty over innovation. Asia-Pacific regions show more balanced approaches, with Singapore and Hong Kong implementing comprehensive frameworks to capture innovation benefits while managing risks. Middle Eastern regulators demonstrate growing sophistication, with the UAE launching its Payment Token Services Regulation and the first dirham-pegged stablecoin beginning operations.

Central bank positions reflect broader geopolitical tensions. The regulatory divide over stablecoins represents more than technical disagreement about digital assets. It reflects fundamental tensions about monetary sovereignty, geopolitical competition, and the future of international finance. The outcome will shape global financial architecture for decades, determining whether stablecoins become tools of American economic power or sources of international monetary cooperation.