Bank of England Governor Bailey Endorses Stablecoins, Signals Regulatory Shift to Reduce Bank Dependence

Bank of England Governor Andrew Bailey, in a Financial Times article published on Wednesday, argued that stablecoins could weaken the UK's reliance on commercial banks, hinting at a reevaluation of the central bank's stance on digital assets. Bailey described the traditional fractional reserve banking model—where banks hold a portion of deposits and lend the rest—as only one possible system structure, emphasizing that "most of the assets backing commercial bank money are not risk-free: they are loans to individuals and to companies." He added, "The system does not have to be organised like this," and proposed that it is possible to separate money from credit provision, allowing stablecoins and banks to coexist while non-banks take on a larger share of lending.

Bailey cautioned that any such shift must be carefully studied to address operational and credit risks. He revealed that the BoE will publish a consultation paper in the coming months on a systemic stablecoin regime, targeting tokens used for everyday payments or settling tokenised core financial markets. Notably, he suggested that widely used UK stablecoins should have access to accounts at the Bank of England to bolster their legitimacy, potentially extending central bank privileges to issuers that meet stringent requirements. This contrasts with his July remarks, where he warned against banks issuing stablecoins and advocated for tokenising deposits instead.

Despite his supportive tone, Bailey stressed that stablecoins must be backed by risk-free assets, insured against operational failures like hacks, and adhere to standardized exchange terms to maintain financial stability. He wrote, "It should also be possible to have innovation in the form of money," and concluded, "It would therefore be wrong to be against stablecoins," indicating a gradual shift in the BoE's approach as the UK moves toward clearer regulations. The comments follow criticism from crypto advocacy groups over proposed individual caps on stablecoin holdings, with Coinbase executive Tom Duff Gordon warning that such measures could leave the UK behind other jurisdictions.