Stablecoins are gaining popularity in the UK financial market, but concerns over oversight and asset backing have raised alarms with the Bank of England’s Financial Policy Committee (FPC). In their April 2025 report, the FPC highlighted the risks associated with poor asset quality and foreign denomination of stablecoins, particularly during times of market stress.
The FPC emphasized the importance of regulatory oversight for both systemic and non-systemic stablecoins to ensure they can meet redemption requests and maintain value stability in volatile market conditions. One of the central concerns raised by the committee is the quality of assets backing stablecoins, especially those denominated in foreign currencies like the US dollar. If these coins are backed by illiquid or risky assets, they could trigger market instability and affect core financial markets in the UK.
Additionally, the FPC warned about the potential for currency substitution in domestic economies as the use of stablecoins denominated in foreign currencies increases. This could pose macro-financial vulnerabilities, especially in cross-border retail payments for households and SMEs. On the wholesale side, the committee cautioned that settling transactions outside of central bank money could increase counterparty credit risk and reduce liquidity management capabilities during stress events.
The UK is actively developing regulatory regimes for stablecoins, aligning with global efforts to set standards for regulating crypto markets and stablecoins. The FPC will continue monitoring the size, usage, and interconnectedness of the stablecoin sector with the broader financial system, which is expected to grow in the future. While the committee did not identify an immediate threat from stablecoins, they emphasized the need for proactive regulatory action to mitigate future risks as adoption increases.
Moving forward, the FPC will focus on ensuring that stablecoins, particularly those used in payments, can operate safely without compromising monetary sovereignty or financial resilience. With coordination with global regulatory bodies and ongoing monitoring, the UK aims to address the challenges posed by stablecoins while fostering innovation in the digital asset space.
As the financial landscape evolves, the regulation of stablecoins will play a crucial role in maintaining stability and security in the UK financial system. By staying proactive and adaptive to market developments, the Bank of England and regulatory authorities aim to safeguard financial stability while embracing the potential benefits of stablecoin technology.