UK Regulators Warn of Growing Stablecoin Risks to Financial Stability

United Kingdom regulators have expressed growing concerns about the impact of stablecoins and the broader crypto industry on the country’s financial system and monetary stability. During recent Financial Policy Committee meetings, regulators acknowledged that while the current interconnectedness of unbacked crypto asset markets with the real economy and financial sector is growing but remains relatively limited, the expansion of stablecoins and crypto markets in the past year has drawn heightened regulatory attention.

The UK, its central bank, and the local regulator, the Financial Conduct Authority, have been developing frameworks for stablecoins to ensure financial resilience. The committee identified key determinants of stablecoin resilience, including the liquidity, credit, and market risks of their backing assets. These factors are crucial to ensure that redemptions can be met in a timely manner at par, even during periods of stress.

The committee raised alarm over the greater issuance of sterling offshore stablecoins with inappropriate backing assets. This trend has implications for UK financial markets and could make some economies vulnerable to currency substitution, even with appropriate regulation. The committee also expressed concern that if stablecoin use were to move beyond crypto settlements, it could result in implications for retail and wholesale cross-border payments. In retail flows, stablecoin use by households and small and medium-sized enterprises could increase counterparty risk for cross-border payments.

These concerns follow reports of growing stablecoin adoption beyond crypto remittances in emerging markets, particularly in Africa. A recent report highlighted that stablecoins now make up nearly half of all transaction volume in Sub-Saharan Africa. Similarly, a late 2024 report suggested that several emerging economies across Africa have the potential to become digital asset hubs. Experts often point to the unavailability of banking services and unstable local fiat currencies as reasons why developing countries are eager to adopt dollar-based stablecoins and crypto.

The United Kingdom is not alone in its concerns. The European Securities and Markets Authority recently warned that the crypto industry could increasingly threaten traditional financial markets’ stability as it grows and becomes more entwined with conventional finance players. The authority’s executive director stated that future sharp drops in crypto prices could have knock-on effects on the financial system. Local regulators are already taking action on these concerns, with the European Union’s insurance authority proposing a rule that would mandate insurance firms to maintain capital equal to the value of their crypto holdings to mitigate risks for policyholders.