Bank of England Warns Stablecoins Could Undermine Financial Stability

The Bank of England has expressed concerns about the potential impact of stablecoins on traditional financial systems. Governor Andrew Bailey, during a lecture at the Andrew Crockett Memorial, highlighted the need for central banks to closely monitor the evolution of payment systems. Stablecoins, which are digital currencies pegged to real-world assets like the US dollar, are designed to maintain stable value. However, Bailey warned that their widespread adoption could undermine the trust in traditional money and the overall stability of the financial system.

Bailey emphasized the importance of ensuring the singularity of money and maintaining trust in it. He noted that if stablecoins become a new form of money, central banks must address how to regulate them to prevent any disruption to the financial system. He also raised questions about the role of reserve currencies if private stablecoins gain more traction. According to Bailey, official reserves today might be more about managing stress in the financial system rather than backing up a currency. He suggested that these reserves could be crucial for maintaining liquidity during times of extreme stress.

Bailey's remarks come at a time when US lawmakers are pushing forward legislation on stablecoins. The GENIUS Act, recently passed in the Senate, aims to regulate the stablecoin industry and provide legal clarity. Supporters of the bill believe it could strengthen the dollar by promoting the use of dollar-backed coins globally. However, some experts are concerned that countries adopting these digital dollars might become overly reliant on the US, leading to a form of "digital dollarization."

As the new head of the Financial Stability Board, Bailey has consistently warned about the potential risks associated with new forms of money. He stressed the importance of central banks staying vigilant about changes in payment methods and their potential impact on the financial system. Bailey noted that while innovation in payment systems can bring benefits, it could also introduce fragility into the money system. Therefore, careful monitoring and regulation are essential to ensure the stability and trust in the financial system.