UK regulators have expressed concern about the impact of the increasing popularity of stablecoins and other cryptocurrencies on the country’s financial system and monetary stability. The regulatory attention has been high as stablecoin and crypto markets have expanded significantly in the past year. This concern was revealed during meetings of the Financial Policy Committee held early April.
The UK, the Financial Conduct Authority, and its central bank are working on frameworks for stablecoins that would ensure financial resilience. The committee has found that a stablecoin’s resilience depends heavily on the liquidity, credit, and market risks of its backing assets. These allow for timely redemptions, even during periods of financial stress.
Another growing concern is the greater issuance of sterling offshore stablecoins backed by inappropriate assets. The committee warned that even with proper regulation, increased use of stablecoins denominated in foreign currencies could expose some economies to currency substitution risks.
The broad adaptation of stablecoins beyond crypto settlements is feared to have implications for retail and wholesale cross-border payments. This could increase the counterparty risks especially if households and small to medium-sized enterprises adopt stablecoins for cross-border payments.
Stablecoin adoption is rising, especially in Africa. A recent report revealed that stablecoins account for about half of all transaction volumes in Sub-Saharan Africa. Yet, the trend is less prevalent in developed countries with stable financial infrastructures.
The UK is not alone in these concerns. The European Securities and Markets Authority has warned that the growing crypto industry could pose a threat to traditional financial markets’ stability.