The increasing presence of cryptocurrencies and stablecoins is prompting UK regulators to warn of possible dangers to the stability of the monetary system.
UK regulatory bodies are becoming increasingly uneasy about the effects stablecoins and the crypto industry may have on financial stability and monetary policy.
At the Financial Policy Committee meetings on April 4 and 8, regulators pointed out that despite the growing interconnectedness of unbacked crypto markets with the economy, the rapid rise of stablecoins and crypto markets in the past year has intensified regulatory concern.
The UK, its central bank, and the Financial Conduct Authority have made developing stablecoin frameworks to enhance financial resilience a priority.
The committee believes it has established the factors that contribute to a stablecoin’s resilience.
“A key determinant of the resilience of stablecoins was the liquidity, credit and market risks of their backing assets, which were in place to ensure that redemptions can be met in a timely manner at par, even in periods of stress.“
The committee raised alarm over the “greater issuance of sterling offshore stablecoins with inappropriate backing assets.”
The committee pointed out that this has implications for UK financial markets, emphasizing that, “even with appropriate regulation, greater use of stablecoins denominated in foreign currencies could make some economies vulnerable to the currency substitution.”
Committee members are concerned that if stablecoin adoption grows beyond crypto settlements, it could affect cross-border payments in both retail and wholesale sectors.
Retail use of stablecoins by households and SMEs for cross-border payments could cause currency substitution, which would elevate counterparty risk.
This statement followed reports about the expanding use of stablecoins in emerging markets, with a focus on Africa, extending beyond just crypto remittances.
Stablecoins now make up close to half of all transaction volume in Sub-Saharan Africa, as per a recent report by Chainalysis.
In late 2024, a report noted that a number of African emerging markets have the potential to position themselves as digital asset hubs.
Yet, experts have not reported such trends in developed economies where financial infrastructure is readily available.
Experts attribute the adoption of dollar-backed stablecoins and cryptocurrencies in developing countries, especially in Africa, to the scarcity of banking services and the volatility of local currencies.
Alongside the UK, other nations are equally concerned about the potential impact of stablecoins and the broader cryptocurrency industry on monetary stability.
According to the European Securities and Markets Authority (ESMA), the growing influence of crypto and its integration with traditional finance will increasingly undermine the stability of financial markets. ESMA’s executive director, Natasha Cazenave, commented:
“We cannot rule out that future sharp drops in crypto prices could have knock-on effects on our financial system.”
Local regulators have already started taking actions to address these concerns.
To mitigate risks for policyholders, the European Union’s insurance regulator proposed in late March that insurance firms must maintain capital equivalent to their crypto holdings.
Recently, the European Central Bank has advocated for shielding Europe from the expanding hold of U.S. dollar-backed stablecoins.
Piero Cipollone, an ECB executive, highlighted the U.S.’s increasingly crypto-friendly stance and its push to broaden the global presence of dollar stablecoins, which he considers worrisome.
In response, Cipollone suggests that launching a digital euro could curb the influence of foreign currency stablecoins as a prevalent form of exchange in the eurozone.
