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An official committee of the Bank of England tasked with monitoring the economy of the UK says it will continue to monitor developments in stablecoins and the financial risks associated with these assets.
In a report of its April 4th and April 8th meetings, the Financial Policy Committee (FPC) identifies the risks posed by stablecoins as the market for these stable asset-pegged cryptocurrencies grew in size and activity over the past year.
“Greater issuance of sterling offshore stablecoins with inappropriate backing assets, or backing assets on which the risk is poorly managed, could be vulnerable to greater risk of fire-sales of backing assets, with implications for core financial markets in the UK.”
The body warns against the dominance of stablecoins backed by foreign currencies, even as the UK and other jurisdictions work on developing regulatory regimes for these assets.
“Even with appropriate regulation, greater use of stablecoins denominated in foreign currencies could make some economies vulnerable to currency substitution and other macro financial implications.”
The FPC says there are also potential implications for cross-border payments once stablecoin use goes beyond crypto settlements.
“For retail flows, stablecoins could see greater household and SMEs use for cross-border payments, which may result in currency substitution. For wholesale flows, settlement outside of central bank money could increase counterparty credit risk and make it harder to moderate increased volatility in cross-border flows through central bank liquidity facilities.”
