UK Regulator Sounds Alarm on Stablecoin Risks Amid Crypto’s Growing Footprint
The Bank of England’s Financial Policy Committee (FPC) has issued a clear warning about the growing risks posed by the expanding use of the stablecoin and unbacked crypto assets.
During its meetings on April 4 and April 8, the Committee observed a notable rise in activity within the stablecoin and unbacked crypto markets over the past year.
Stablecoin Risks Take Center Stage in FPC Discussions
The FPC focused heavily on the quality and liquidity of reserves backing stablecoins, which are needed to support redemptions at par value, especially during market stress. Reserves that are poorly managed or difficult to liquidate could trigger fire sales, potentially destabilizing core financial markets—particularly if sterling-denominated stablecoins issued offshore continue to grow in popularity.
The Committee also flagged the risk of currency substitution. In countries where foreign-denominated stablecoins gain traction, local currency use in both retail and wholesale markets could decline, weakening domestic monetary systems. The FPC also noted that stablecoins are increasingly used beyond crypto settlements, raising new risks for cross-border payments and off-chain settlements. While unbacked crypto assets have not yet caused systemic issues, their growing links to traditional finance require closer monitoring.
To address these risks, the FPC emphasized the need for ongoing surveillance and stronger international coordination. The Committee backed the Financial Stability Board’s global framework for regulating both stablecoins and unbacked crypto assets. Conflicts of interest during the meetings were disclosed transparently. Members Jon Hall and Liz Oakes recused themselves due to professional affiliations. This discussion took place as UK regulators raised concerns about younger investors turning to crypto over more traditional investment vehicles.
FCA chief Nikhil Rathi noted that millions of under-35s in the UK have entered the financial market through crypto assets rather than stocks, a trend he sees as risky. The FCA has pushed for more savings to flow into long-term financial instruments like stocks and bonds, citing the UK’s lower rate of direct share ownership compared to countries such as the United States and Sweden. As of now, around 12% of British adults—roughly seven million people—have had some exposure to crypto.
Stablecoin Regulation Amid Broader Financial Fragility
Beyond the crypto space, the FPC discussed broader threats to financial stability in an environment shaped by heightened geopolitical tensions and economic uncertainty. A steep decline in risky assets, particularly those denominated in US dollars, and the effects of new US trade tariffs have contributed to a volatile backdrop.
Despite the turbulence, market functioning remained resilient, supported by high trading volumes. However, the FPC warned that further corrections in equities and commodities remain likely. Fragmentation in global trade and finance adds another layer of risk. Reduced international cooperation, rising public debt, and the growing threat of cyberattacks all compound the challenges facing policymakers.
Domestically, the FPC flagged vulnerabilities in market-based finance. In particular, increased leverage among hedge funds and a sharp rise in net gilt repo borrowing could worsen any market shock if large positions were unwound quickly. Private equity firms and highly leveraged corporates relying on market-based funding were also highlighted as potential weak points. If refinancing conditions tighten, these entities may come under intense financial pressure. Despite these concerns, UK households and most corporations have remained relatively resilient, thanks to low arrears and manageable debt-to-income ratios. These discussions reflect the FPC’s increased focus on crypto assets, particularly stablecoins, as part of its financial stability agenda.