Bank of England Warns of Stablecoin Risks to UK Financial Stability

The Bank of England’s Financial Policy Committee (FPC) has raised significant concerns about the growing scale and relevance of stablecoins, warning that inadequate oversight and inappropriate asset backing could pose new risks to UK financial stability, especially during times of stress. The FPC's April 2025 record highlights that while stablecoins continue to expand, their potential to disrupt traditional financial systems necessitates robust regulatory frameworks.

The FPC emphasized that both the Bank of England and the Financial Conduct Authority are actively developing regulatory regimes for both systemic and non-systemic stablecoins. These frameworks aim to ensure that stablecoins can meet redemption requests reliably and maintain parity even in volatile market conditions. The committee's concerns are centered around the quality of assets backing stablecoins, particularly those denominated in sterling and issued offshore. If these coins are backed by illiquid or risky assets, or if the associated risks are not well-managed, they could trigger fire sales during periods of market strain, potentially affecting core financial markets in the UK.

The FPC also warned about the growing use of stablecoins denominated in foreign currencies, such as US dollar-backed tokens. This trend could lead to "currency substitution" in domestic economies, increasing macro-financial vulnerabilities. While the current adoption of foreign stablecoins for cross-border retail payments remains limited, the committee noted that greater use by households and small to medium-sized enterprises (SMEs) could exacerbate these risks. On the wholesale side, the settlement of transactions outside of central bank money could increase counterparty credit risk, reduce central banks’ ability to manage liquidity, and dampen volatility during stress events.

The UK is part of a growing list of jurisdictions developing tailored stablecoin regulations. The FPC supports global efforts to set standards, citing the Financial Stability Board’s recommendations on regulating crypto markets and stablecoins. The central bank will continue monitoring the stablecoin sector’s size, usage, and interconnectedness with the broader financial system, which has remained relatively limited but is expected to grow. While the committee did not indicate an immediate threat from stablecoins, it stressed the importance of proactive regulatory action to mitigate future risks as adoption rises.

The FPC’s next steps will focus on ensuring that stablecoins, particularly those used in payments, can operate safely without undermining monetary sovereignty or financial resilience. The committee's warning serves as a reminder that while stablecoins offer benefits such as faster and cheaper transactions, they also present challenges that must be addressed to protect the financial system. The FPC's call for enhanced oversight is part of a broader effort to ensure the stability of the financial system in the face of emerging technologies. The committee's concerns reflect a growing recognition of the potential risks associated with digital currencies and the need for comprehensive regulatory measures. The FPC's statement underscores the importance of regulatory vigilance in the rapidly evolving landscape of digital finance. As stablecoins continue to gain popularity, it is essential for regulators to stay ahead of the curve and implement measures that safeguard the financial system. The FPC's concerns highlight the need for a proactive approach to regulation, ensuring that stablecoins are subject to the same level of oversight as traditional financial instruments. This will help to mitigate the risks associated with these digital assets and promote a stable and secure financial environment.