The Bank of England’s Financial Policy Committee (FPC) recently issued a warning about the increasing risks associated with the use of stablecoins and unbacked crypto assets. In their meetings on April 4 and April 8, the Committee highlighted the significant growth in activity within these markets over the past year.
Stablecoins, in particular, were a major focus of the discussions. The FPC expressed concerns about the quality and liquidity of reserves backing stablecoins, emphasizing the importance of these reserves in supporting redemptions at par value, especially during times of market stress. Poorly managed or illiquid reserves could lead to fire sales, potentially destabilizing core financial markets, particularly if offshore sterling-denominated stablecoins continue to gain popularity.
Additionally, the Committee raised alarm about the risk of currency substitution in countries where foreign-denominated stablecoins become popular. This could lead to a decline in the use of local currencies in both retail and wholesale markets, weakening domestic monetary systems.
Furthermore, the FPC noted that stablecoins are now being used beyond crypto settlements, posing new risks for cross-border payments and off-chain settlements. While unbacked crypto assets have not yet caused systemic issues, their increasing integration with traditional finance necessitates closer monitoring.
To address these risks, the FPC emphasized the importance of ongoing surveillance and stronger international coordination. The Committee endorsed the Financial Stability Board’s global framework for regulating stablecoins and unbacked crypto assets.
During the meetings, conflicts of interest were transparently disclosed, with members Jon Hall and Liz Oakes recusing themselves due to professional affiliations. These discussions coincided with UK regulators expressing concerns about younger investors turning to crypto assets over more traditional investment vehicles.
FCA chief Nikhil Rathi highlighted that millions of under-35s in the UK have entered the financial market through crypto assets rather than stocks, a trend he deemed risky. The FCA has been advocating for more savings to flow into long-term financial instruments like stocks and bonds, pointing out the UK’s lower rate of direct share ownership compared to countries like the United States and Sweden. Currently, around 12% of British adults, roughly seven million people, have some exposure to crypto.
In addition to the focus on stablecoins and crypto assets, the FPC discussed broader threats to financial stability in a landscape marked by heightened geopolitical tensions and economic uncertainty. A sharp decline in risky assets, particularly those denominated in US dollars, alongside new US trade tariffs, has contributed to a volatile environment.
Despite the volatility, market functioning has remained resilient, supported by high trading volumes. However, the FPC cautioned that further corrections in equities and commodities are possible. Fragmentation in global trade and finance, reduced international cooperation, rising public debt, and the increasing threat of cyberattacks all add to the challenges facing policymakers.
Domestically, the FPC identified vulnerabilities in market-based finance, highlighting increased leverage among hedge funds and a surge in net gilt repo borrowing as potential risks. Private equity firms and highly leveraged corporates reliant on market-based funding were also identified as weak points that could face financial pressure if refinancing conditions tighten.
Despite these concerns, UK households and most corporations have shown relative resilience, with low arrears and manageable debt-to-income ratios. The FPC’s discussions underscore its heightened focus on crypto assets, particularly stablecoins, as part of its financial stability agenda.