United Kingdom regulators are becoming increasingly alarmed by how stablecoins and the wider cryptocurrency sector may affect the nation’s financial system and monetary stability.
In meetings of the Financial Policy Committee held on April 4 and 8, officials observed that, although the current “interconnectedness of unbacked crypto asset markets with the real economy and financial sector is growing but remains relatively limited,” there has been a significant expansion in the use of stablecoins and crypto markets over the past year, necessitating closer regulatory scrutiny.
The UK, along with its central bank and local regulatory body, has been working on frameworks for stablecoins aimed at bolstering financial resilience. The committee has identified key factors that contribute to a stablecoin’s robustness:
“A primary factor influencing the resilience of stablecoins is the liquidity, credit, and market risks associated with their backing assets, ensuring that redemptions can be managed promptly at par, even during periods of stress.”
The committee expressed concern about the increasing issuance of offshore sterling stablecoins backed by unsuitable assets. They noted this poses risks to UK financial markets and cautioned that, “even with suitable regulation, a broader use of stablecoins in foreign currencies could expose certain economies to risks of currency substitution.”
Members of the committee are particularly apprehensive that if stablecoins gain traction beyond cryptocurrency settlements, they could lead to “implications for retail and wholesale cross-border payments.” In retail transactions, the adoption of stablecoins by households and small to medium-sized enterprises for cross-border payments might lead to “currency substitution,” thus heightening counterparty risks.
This concern is underscored by reports indicating a rise in stablecoin usage not limited to cryptocurrency remittances in emerging markets, particularly in Africa. A recent report highlighted that stablecoins now account for almost half of all transaction volume in Sub-Saharan Africa.
Similarly, a late 2024 analysis suggested numerous emerging economies across Africa could evolve into hubs for digital assets. Ben Caselin, chief marketing officer of a Johannesburg-based crypto exchange, remarked that “South Africa serves as the gateway to the rest of Africa, benefiting from a strong rule of law and an independent judiciary, making it straightforward to establish a business there.”
Despite this, instances of comparable trends within developed nations that have accessible financial infrastructures are rare. Experts often cite the lack of banking services and unstable local currencies as reasons why developing countries, particularly in Africa, are keen to adopt dollar-backed stablecoins and cryptocurrencies.
The United Kingdom is not alone in its concerns regarding the effects of stablecoins and the larger cryptocurrency landscape on monetary stability. The European Securities and Markets Authority (ESMA) has also recently cautioned that the growth of cryptocurrency may increasingly jeopardize the stability of traditional financial markets as it becomes more integrated with established financial players. ESMA’s executive director emphasized that:
“We cannot dismiss the possibility that significant declines in cryptocurrency prices could have ripple effects on our financial system.”
In response to these worries, local regulators are taking action. In late March, the European Union’s insurance authority proposed a comprehensive regulation that would require insurance companies to hold capital equivalent to the value of their cryptocurrency holdings to help mitigate risks for policyholders.