FSB Warns G20 of Stablecoin Risks Ahead of Summit

The Financial Stability Board (FSB) has prioritized the growing influence of stablecoins ahead of the upcoming G20 summit. In a letter to G20 finance ministers and central bank governors, newly appointed FSB Chair and Governor of the Bank of England, Andrew Bailey, highlighted the need to assess the expanding role of stablecoins in payments and settlements, citing potential risks to monetary trust, credit creation, and financial oversight.

Bailey emphasized that the rapid expansion of stablecoins, digital assets typically pegged to fiat currencies, poses significant challenges. He noted that the potential risks and impacts of stablecoins are underexplored due to the rapid pace of market developments. Bailey called for continued implementation of agreed recommendations, monitoring of developments, and collaboration across jurisdictions to address these issues.

The FSB's renewed scrutiny follows its earlier efforts to regulate stablecoins, including a 2021 global framework for monitoring their use. The watchdog has also warned of increased adoption in emerging markets, where stablecoins have become an accessible alternative to volatile local currencies and inefficient banking systems. In response, the FSB plans to expand its work on understanding stablecoin-related risks in these economies.

Bailey has voiced concerns about the systemic risks posed by the trend of private banks issuing their own stablecoins. He argued that such instruments could undermine traditional credit mechanisms and monetary policy control. Instead, Bailey advocated for the digitization of bank deposits, calling it a safer and more regulated path that preserves central bank oversight.

The FSB's warnings come against the backdrop of growing geopolitical and financial uncertainty. Bailey's letter pointed to recent market volatility as a reminder of the financial system's vulnerabilities, especially outside traditional banking. He noted the importance of robust surveillance and regulatory coordination, particularly in light of the shift toward non-bank financial intermediation and the emergence of new technologies like stablecoins.

Key concerns raised include the potential for stablecoins to erode the "singleness of money," a term used to describe the unified trust in currency across the economy. Bailey warned that if stablecoins begin circulating outside regulated systems, they could create parallel forms of money, complicating monetary policy and cross-border payments.

In the U.S., lawmakers recently passed the GENIUS stablecoin bill, marking a major step toward the formal integration of stablecoins into the mainstream financial system. However, Bailey has expressed concern about the systemic risks of this trend, arguing against the idea of private banks issuing their own stablecoins. He stated that such instruments could undermine traditional credit mechanisms and monetary policy control.

Bailey's warnings highlight the need for robust regulatory frameworks to manage the risks associated with stablecoins. As the global stablecoin market continues to grow, the FSB's efforts to monitor and regulate these digital assets will be crucial in maintaining financial stability and protecting the interests of consumers and investors alike.