Bank of England Governor Warns Stablecoins Could Trigger Bank Runs

Bank of England Governor Andrew Bailey has expressed significant concerns over the potential risks associated with stablecoins, particularly if issued by major banks. In a recent interview, Bailey highlighted that stablecoins could trigger bank runs and facilitate money laundering, thereby posing substantial threats to the financial system. He emphasized that these digital currencies, while designed to maintain a stable value, could undermine banks' lending capabilities, especially during economic downturns. This stance aligns with a growing global caution among regulators who are seeking safer paths toward digital money innovation.

Bailey's primary concern is that stablecoins, which are typically backed by traditional assets like the US dollar or government bonds, could lead to a situation where people rush to withdraw their money and switch to stablecoins. This could result in a bank run, a scenario where banks run out of cash because too many people try to take out their money at once. Such a situation could severely disrupt the financial system and hinder banks' ability to lend money to households and businesses, which is crucial for economic growth.

In response to these risks, Bailey has proposed an alternative: tokenized bank deposits. These are digital versions of the money already held in bank accounts, issued and controlled by the banks themselves. Unlike stablecoins, tokenized deposits remain fully within the existing banking system, are regulated, and backed by reserves, making them much less risky. This approach allows for digital innovation without adding new threats to the system, ensuring that people can still enjoy the speed and convenience of digital payments while maintaining the trust and stability provided by banks.

Bailey's concerns extend beyond bank runs to include the potential for crime. He warned that unregulated stablecoins could be used for illegal activities, making it difficult for authorities to track down financial crimes such as fraud and money laundering. Additionally, if a significant amount of money flows into stablecoins, it could weaken central banks' ability to manage the economy, particularly during crises when swift action and strong control are essential.

The debate over stablecoins is ongoing worldwide, with some countries testing them in small pilot programs while others issue warnings. Bailey's message underscores the idea that digital innovation does not always equate to better outcomes, especially when the risks are not fully understood. The Bank of England is not against digital money but insists that any move forward must be safe, stable, and backed by trust. For now, Bailey advocates for tokenized bank deposits over privately issued stablecoins as the safer and more regulated alternative.