In an address that underscores growing concerns over the evolving landscape of digital finance, Bank of England Governor Andrew Bailey has issued a stern warning to commercial banks considering the issuance of their own stablecoins. As reported by the Times, Bailey says he prefers tokenized deposits over stablecoins. Meanwhile, the US is poised to enact federal rules for stablecoin issuers with many anticipating that big banks will quickly enter the market.
Bailey also came out against the UK issuing a digital pound or central bank digital currency (CBDC). This contrasts with the European Union which is determinedly heading in this direction. The UK is investigating a CBDC but has yet to decide as to whether or not to pursue this policy.
CBDCs is another sector where the US has taken a strong stance as legislation banning the central bank from issuing a consumer CBDC is expected to be approved by Congress later this week.
While stablecoins offer benefits like faster transactions and lower costs plus broader distribution, Bailey cautioned that allowing commercial banks to issue their own stablecoins could undermine the central bank’s control over monetary policy and destabilize the financial ecosystem.
Bailey said:
“The issuance of stablecoins by private entities, particularly banks, raises profound questions about the integrity of money and the risks to systemic stability.”
The governor’s concerns center on several key issues.
First, he said there is the potential for private stablecoins to erode trust in the broader financial system.
A failure or mismanagement of such a stablecoin could trigger a domino effect, shaking confidence in both the issuing bank and the wider banking sector.
Bailey pointed to historical examples of financial crises sparked by poorly managed private currencies, underscoring the need for caution.
Central banks like the Bank of England rely on tools such as interest rates and reserve requirements to regulate money supply and stabilize economies.
If banks begin issuing their own stablecoins, it could create a parallel system of money that operates outside the central bank’s direct control.
This fragmentation, Bailey argued, could weaken the ability to manage inflation, stabilize exchange rates, and respond to economic shocks.
Bailey urged regulators worldwide to collaborate on frameworks that balance innovation with safeguards, ensuring that stablecoins do not become a weak link in the financial chain.
He also took a swipe at the world’s most popular crypto – Bitcoin – which has hit new all time highs. Bailey siad Bitcoin is not money and is a “very volatile, unbacked asset.”
“… if you’re going to buy it, please buy it with your eyes open.”