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The Bank of England’s Financial Policy Committee has closely monitored the risks associated with the rise of stablecoins in the UK economy. During meetings on April 4 and 8, the committee assessed the financial risks posed by the growth activities of stablecoins in the market.
Stablecoin Risks
The report revealed that the stablecoin market is rapidly expanding and highlighted the risks that could arise from inadequate support asset quality. The Financial Policy Committee emphasized that stablecoins issued with inappropriate collateral might adversely impact core financial markets.
Financial Policy Committee (FPC): “Sterling-denominated stablecoins backed by unsuitable collateral may be exposed to sudden asset sale risks, which could affect the core financial markets in the UK.”
Regulatory Efforts and Economic Implications
Officials noted that the increase of stablecoins expressed in foreign currencies could heighten economies’ exposure to currency fluctuations. Regulatory bodies are continuing their work on developing new oversight mechanisms for these assets.
Financial Policy Committee (FPC): “Even with appropriate regulation, the rising use of foreign currency stablecoins could leave some economies vulnerable to currency exchange and other macro-financial impacts.”
The committee pointed out that the growing use of stablecoins for cross-border transactions could elevate risks for both individual and institutional financing. The potential uncertainties in areas such as credit risk and market volatility are being evaluated due to this shift in payment systems.
Financial Policy Committee (FPC): “The use of stablecoins in individual transactions may lead households and small businesses to prefer cross-border payments; in wholesale transactions, settlements outside central bank money could increase counterparty credit risk, complicating liquidity control.”
The report stressed the need for robust collateral structures and improved regulatory frameworks to mitigate financial risks. Closely monitoring current developments and market dynamics is crucial to prevent potential adverse effects.
Financial institutions and regulatory authorities have decided to continue preparing forward-looking reports by tracking developments in the stablecoin market. Such monitoring is perceived as beneficial for the overall stability of the financial system.
