UK Regulator Flags Stablecoin Risks as Crypto Grows in Financial System

The Bank of England’s Financial Policy Committee (FPC) has warned as the stable coin and unbacked crypto assets usage increases.

A significant level of activity was observed in the stablecoin and unbacked crypto markets during the past year observed the Committee in its meetings on 4 and 8 April.

Stablecoin Risks Take Center Stage in FPC Discussions

The FPC took into account the quality and liquidity of the underlying assets, which must be able to absorb redemption at par value and above all, also in a stress scenario on the market.

If deposits become lost or illiquid then resulting in fire sales could destabilise the main financial markets, particularly the increasing sterling denominated offshore stable coins.

The Committee also cautioned on the danger of currency substitution. If the countries where the foreign currency of stable coin to be issued, then the use of domestic currency in retail and wholesale markets will be reduced and will be debilitated in domestic currency systems.

The FPC also found that stablecoins are increasingly being put to use in leverage to crypto settlement and by this means, new possibilities of cross-border settlement and off-chain settlement.

Though unbacked crypto assets have not yet turned systemic, that they are increasing in interconnectedness with traditional finance is something that must be monitored more closely.

To tackle these dangers, the FPC reiterated the significance of on-going monitoring and more international co-operation.

The Committee backed the global approach by the Financial Stability Board to regulating stable coins and unbacked cryptos.

Interests of conflict were openly declared at the meetings. Members Jon Hall and Liz Oakes declared a personal interest and they vacated the room.

This chat emerged just after British regulators expressed concerns that younger investors were resorting to cryptocurrency instead of other traditional investment products.

A total of millions of 35- and-unders in the UK has entered the financial markets with crypto assets before stocks, which is reckless, said FCA CEO Nikhil Rathi.

The FCA has been urging more savings to be invested in long-term – in shares and bonds – as it points out that the UK is one of the countries with the lowest direct share ownership in the world compared to the US and Sweden.

It is believed there are some seven million people about 12% of the British population who have encountered crypto in some form.

Stablecoin Regulation Amid Broader Financial Fragility

Outside the crypto world, the FPC examined other risks to financial stability in a high geopolitics and uneconomic uncertainty context.

New round of selling in assets that are high-risk and especially those denominated in dollar, and US tariffs added more uncertainty.

Even the volatility, market conditions were calm and high trading. However, the FPC also stated that, more changes in the equities and commodities are still probable.

Besides, the disintegration of the global commerce and finance raises the danger.

Less international cooperation, more public debt and increasing cyber threats make things harder for policymakers.

Domestically, FPC found the problem in the market-based finance.

Notably, a very large rise in the leverage of hedge funds and a substantial rise in net gilt repo borrowing could make any market shock costlier if huge positions were to be liquidated quickly.

As well as private equity funds and high-gear corporates chasing market-based funding were named as potential shocks.

If financing conditions weaken, these firms will be under considerable financial pressure.

However, so far they have been protected from low arrears and manageable debt to income ratios, even though despite these concerns, UK households and almost all businesses.

The exchanges indicate the FPC’s increasing attention to crypto assets – in particular stable coin – within the FPC’s scope for financial stability.