Key Takeaways
- A growing number of banks are exploring issuing their own stablecoins.
- Bank of England (BoE) Governor Andrew Bailey said he would rather banks issue tokenized deposits.
- Globally, policymakers are split on the future of digital money.
With a growing number of banks exploring stablecoins, global regulators are considering the implications for financial stability.
To that end, Bank of England (BoE) Governor Andrew Bailey said he “would much rather” banks offer tokenized deposits than stablecoins, which he warned come with risks that make them an inappropriate mainstream payment instrument.
Banks Explore Stablecoin Options
In recent months, major financial institutions, including Santander, Société Générale, and a coalition of America’s largest banks, have started exploring their stablecoin options.
The flurry of interest comes as the U.S. government is poised to regulate the sector via the GENIUS Act, which faces a procedural vote in the House this week.
By allowing them to issue coins under their existing licenses, the bill could give banks a regulatory edge over the technology companies that currently dominate the space.
However, despite rising interest and support from the current U.S. administration, the future of bank-issued stablecoins is far from certain.
Andrew Bailey on Bank-Issued Stablecoins
In an interview with the Times on Sunday, July 13, Bailey said stablecoins threatened to take “money out of the banking system” and the “credit creation world”.
He said: “I would much rather [banks] go down the tokenized deposit streets and say, how do we digitize our money, particularly in payments?”
Unlike stablecoins, which are mostly collateralized by government bonds, tokenized deposits are backed on a one-for-one basis with commercial bank money.
Business Model Remains Uncertain
For banks, stablecoins promise to generate predictable revenues from reserve assets.
However, in an interview with CCN, Will Beeson, former Chief Product Officer at Standard Chartered’s tokenization venture, questioned the business logic behind bank-issued stablecoins.
Under the current fractional reserve model, banks generate returns by lending money out to businesses and consumers, but they only need to hold a small portion of that in central bank reserves.
“I would expect [these returns] to be higher than the risk free [interest rate on Treasuries] over the cycle,” Beeson observed. As such, he suggested banks have little incentive to move large amounts of capital into stablecoin reserves.
Policymakers Split on the Future of Digital Money
Having recently started his tenure as chair of the Financial Stability Board (FSB), Bailey’s comments echo the views of many central bankers.
As well as concerns that stablecoins could impact bank lending, there are also worries about the scale of stablecoin reserves, which have ballooned to hundreds of billions of dollars. Against this backdrop, a run on a major coin could significantly disrupt the Treasury market.
However, this skepticism hasn’t stopped U.S. lawmakers, backed by President Donald Trump, from pushing to expand the stablecoin market.
“I would say that the U.S. is going towards stablecoins,” Bailey said. Meanwhile, “the European Central Bank is going towards central bank digital currency. But “neither of them is going towards tokenizing deposits.”
With lawmakers in the U.K. still unconvinced about the necessity of a central bank-issued digital pound, the country may ultimately diverge from its EU neighbors. (And the digital euro project is far from reaching fruition anyway.)
Meanwhile, as Beeson observed, politicians can always “play the legal card” and crack down on private stablecoins if they look set to disintermediate the traditional banking system.
That leaves tokenized deposits as a third path toward digitizing payments that may face the least resistance going forward.
James Morales is CCN’s blockchain and crypto policy reporter. He has been working in the news media since 2020, writing about topics such as payments, banking and financial technology. These days, he likes to explore the latest blockchain innovations and the evolving landscape of global crypto regulation.
With an educational background in social anthropology and media studies, James uses his platform as a journalist to explore how new technologies work, why they matter and how they might shape our future.
