Bailey warns UK stablecoins face run risk, US conflict

Bank of England Governor Andrew Bailey has warned that UK stablecoins could be vulnerable to run risk, while signaling that Britain’s regulatory approach may clash with the framework taking shape in the United States.

What Bailey’s warning means for UK stablecoins

Bailey’s comments highlight growing concern among UK policymakers that stablecoins, if widely adopted for payments, could pose systemic risks to financial stability. The warning comes as the Bank of England moves forward with a proposed regulatory regime for sterling-denominated systemic stablecoins, setting out rules for issuers that could become critical to the UK payments infrastructure.

The BoE has been developing its stablecoin oversight framework since at least 2023, when it published a discussion paper on regulating systemic payment systems using stablecoins. Bailey’s latest remarks sharpen the tone, moving from exploratory consultation to explicit caution about the risks these instruments carry.

The warning matters now because stablecoin legislation is advancing simultaneously in multiple jurisdictions. In the US, the STABLE Act (H.R. 2392) is progressing through Congress, establishing a federal framework for payment stablecoin issuers. The UK and US are setting rules at the same time, and those rules may not be compatible.

Why run risk is central to the debate

Run risk refers to the danger that a large number of stablecoin holders attempt to redeem their tokens simultaneously, similar to a bank run. If the issuer cannot meet redemption demands quickly enough, or if the reserves backing the stablecoin lose value, the token’s peg can break, triggering further panic.

Central bankers treat this scenario seriously because stablecoins function outside traditional deposit insurance schemes. Unlike bank deposits in the UK, which are protected up to £85,000 by the Financial Services Compensation Scheme, stablecoin holdings carry no such guarantee. A confidence shock could cascade through payments networks that rely on stablecoin settlement.

Bailey’s focus on run risk reflects a broader pattern among central bank officials who view stablecoins as bank-like instruments that currently operate without bank-like safeguards. This is the core tension driving the UK’s push to bring systemic stablecoins under formal regulation. The concern parallels how infrastructure vulnerabilities in DeFi protocols have exposed gaps in oversight across the broader crypto ecosystem.

How UK rules could clash with the US approach

Bailey has indicated that the UK’s regulatory direction may conflict with the US framework, according to recent reporting on his remarks. The divergence centers on fundamental questions: what reserves stablecoin issuers must hold, where those reserves must be custodied, and which regulators have authority over cross-border issuers.

The US STABLE Act focuses on establishing federal licensing requirements for payment stablecoin issuers, with an emphasis on reserve composition and transparency. The UK’s approach, by contrast, treats stablecoins through the lens of systemic payment systems, placing the Bank of England at the center of oversight for any stablecoin that becomes widely used in British commerce.

For stablecoin issuers operating across both markets, regulatory conflict creates compliance complexity. A token structured to satisfy US reserve requirements might not meet UK standards, and vice versa. This could fragment the stablecoin market along jurisdictional lines, undermining the borderless utility that makes stablecoins attractive for international payments.

The stakes extend beyond stablecoin issuers. As recent developments in Switzerland have shown, national approaches to digital asset regulation vary widely, and cross-border coordination remains difficult. Governments are increasingly staking out independent positions on digital assets, as seen in debates over sovereign Bitcoin reserve strategies.

Bailey’s warning suggests the UK is prepared to prioritize domestic financial stability over international regulatory alignment, even if that means friction with Washington. With both the US and UK legislating in parallel, the coming months will determine whether the two frameworks can coexist or whether stablecoin issuers will face a fractured regulatory landscape.

Disclaimer: This article is for informational purposes only and does not constitute financial or investment advice. Cryptocurrency and digital asset markets carry significant risk. Always do your own research before making decisions.