tl;dr
Bank of England Governor Andrew Bailey warns against major banks issuing their own stablecoins, favoring tokenized deposits instead to protect financial stability. He cites risks of stablecoins, including threats to lending capacity, financial stability, and money laundering. Bailey argues stablecoi...
Bank of England Governor Andrew Bailey has issued a strong warning against allowing major banks to issue their own stablecoins, marking a clear divergence from the US approach where stablecoin adoption is a major focus in efforts to establish the country as a global crypto hub. Bailey advocates for the adoption of tokenized deposits rather than privately issued stablecoins, emphasizing the need to safeguard financial stability.
Bailey highlights several risks associated with stablecoins, including threats to financial stability, lending capacity, and the facilitation of large-scale money laundering. He stresses that tokenized deposits—digital versions of traditional money issued by banks—offer a safer alternative by maintaining the integrity of the traditional banking system. His position reflects the UK central banking community’s concerns that unregulated stablecoins could weaken banking’s fundamental roles: monetary control and credit creation.
According to Bailey, stablecoins could reduce the funds circulating within traditional banks, consequently limiting their ability to lend. Such displacement risks causing disintermediation, liquidity imbalances, and increasing the likelihood of sudden mass withdrawals during times of financial stress—similar to a bank run scenario like that seen in the FTX collapse. This aligns with European officials’ observations about USD stablecoins potentially threatening euro sovereignty and stability, prompting regulatory responses like the MiCA framework to enforce stricter rules for euro-backed digital assets.
Bailey, who also heads the Financial Stability Board (FSB), further critiques stablecoins by raising alarms over their potential misuse for financial crimes including money laundering, due to the vast, often unregulated movement of funds through private stablecoin networks. This cautionary stance contrasts sharply with the US, where new legislation, notably the GENIUS Act, supports regulated stablecoin adoption, paving the way for initiatives like the Trump-affiliated dollar-backed stablecoin USD1, which has already achieved a $2.2 billion market cap.
The contrasting policies illustrate a growing UK–US divide on digital money, with the UK favoring integration of digital finance into existing monetary frameworks rather than bypassing them. European regulators, in response to US stablecoin growth, have reinforced the importance of developing a digital euro as a counterbalance. Bailey’s remarks also signal skepticism about the immediate need for a UK central bank digital currency (CBDC), suggesting that focusing on digitizing commercial bank deposits is a more prudent and compatible path for modernizing payments and settlement systems without disrupting monetary policy transmission.
Ultimately, Bailey’s preference for tokenized deposits reflects a broader strategy aimed at preserving the banks’ crucial role as credit intermediaries while embracing digital innovation in a controlled and stability-focused manner. This approach seeks to balance the promise of new financial technologies with the imperative of maintaining a robust and resilient financial system.