- UK’s Financial Policy Committee flags risks from offshore-issued stablecoins.
- Growing adoption in emerging markets raises fears of currency substitution.
- Regulators aim to strengthen frameworks for stablecoin resilience.
The UK’s financial watchdogs are increasingly sounding the alarm over the systemic risks posed by the rapid rise of stablecoins. The Financial Policy Committee noted that the growing issuance of offshore sterling-based stablecoins with weak backing could jeopardize the UK’s financial stability.
Another concern stems from the potential for currency substitution. This risk grows, especially if households and small businesses begin using foreign-denominated stablecoins for everyday transactions.
Currency at Risk: Stablecoin Surge Triggers UK Regulatory Scrutiny
Stablecoins, once seen as a niche innovation in crypto, have now gained enough traction to concern the UK’s top financial authorities. The Bank of England and the Financial Conduct Authority are accelerating the development of oversight frameworks. Their goal is to ensure these digital assets are securely backed and transparently operated. They aim to prevent future shocks to the traditional financial system.
One of the Financial Policy Committee’s biggest red flags is the growth of sterling-denominated stablecoins issued outside the UK. If these coins aren’t backed by high-quality liquid assets, their widespread use could amplify systemic vulnerabilities. This risk grows especially during periods of market stress or economic uncertainty.
The UK is not alone in expressing concern. European regulators have echoed similar warnings, with ESMA emphasizing the possibility of crypto asset crashes impacting broader financial markets. Meanwhile, the EU is taking preemptive steps, including proposals that insurance companies fully back crypto holdings with equivalent capital.
Although crypto adoption in the UK has been moderate, its usage in developing countries—particularly in Africa—is booming. This rise is due to unstable local currencies and limited access to banking. This global divergence highlights why the UK is monitoring stablecoin flows closely, even those originating far beyond its borders.
As stablecoins gain ground globally, the UK is moving swiftly to strike a balance between innovation and financial security. The aim is to safeguard both its economy and monetary sovereignty.
“Even with appropriate regulation, greater use of stablecoins denominated in foreign currencies could make some economies vulnerable to currency substitution.” — UK Financial Policy Committee
