Bank of England sounds the alarm on Crypto Stablecoins

The The Bank of England’s deputy governor has issued a warning that regulators may need to restrict the use of stablecoins.

Regulators may need to restrict stablecoins in payments to maintain financial stability, according to the Bank of England’s deputy governor for financial stability. Speaking on Monday at an Innovate Finance conference, Jon Cunliffe said that while the risks to financial stability from stablecoins should be manageable over time, uncertainty about their rate of use and scale remains.

“However, we cannot know with certainty the extent and speed at which stablecoins may be adopted, and we may well need limits, at least initially, to ensure that we avoid disruptive changes that could threaten financial stability,” Cunliffe said.

This warning could have serious implications for stablecoins such as Tether’s USDT, Circle’s USDC and Binance’s BUSD. Stablecoins are cryptocurrency tokens that in theory reflect the value of traditional assets, such as fiat currencies. Regulators are concerned about the assets that underpin their value. Some observers fear that stablecoins pose a risk to the financial system if they become competitors to fiat money.

The recent volatility in crypto markets raises questions about how stable such tokens really are. TerraUSD, an algorithmically stable coin, fell to near zero as investors pulled funds. Investors were widely concerned about the token’s technical model. Furthermore, no framework exists for consumers to get a refund in the event of a stablecoin failure. Unlike commercial bank money, which has deposit insurance up to £85,000 ($105,100).

Stablecoin concerns

Last month, the USDC was reduced after reserves were caught up in the collapse of Silicon Valley Bank. Observers were concerned that a prolonged depegging could unravel much of the DeFi ecosystem.

Cunliffe emphasized that assets behind a stablecoin should be “of sufficient value to meet redemption requests.” Otherwise, to avoid a scenario where systemic stable coins pose a risk to the financial system. He suggested that such assets could include deposits in the Bank of England or highly liquid securities.

The UK government is currently consulting on new regulations to address the risks digital currencies pose to consumers, while ensuring the country remains a place for crypto firms to do business. The upcoming Financial Services and Markets Bill aims to bring asset-backed stablecoins into the regulatory fold. Prime Minister Rishi Sunak has expressed support for crypto, and Britain is exploring a digital version of the British pound, sometimes known as “Britcoin.”