The United States remains at the forefront of the cryptocurrency marketplace. In a major bit of crypto news, President Donald Trump signed off an executive order banning the issuance of central bank digital currency (CBDC), a move that challenges apparent grand visions to build electronic payment systems around the Federal Reserve.
Since taking office, Trump has been pro-crypto, even announcing the creation of a strategic Bitcoin reserve. But now, with this ban being pushed through the House, it has changed the course of that movement.
Though the order does present challenges, it does have regulatory framework in place for the issuance of stablecoins by licensed financial institutions. Such a move is being challenged by the Bank of England’s governor, Andrew Bailey.
Bailey Warns Against the Issuance of Stablecoins
Bailey spot publicly in an interview with The Times recently, speaking directly about the Trump administration’s larger backing of crypto currency. Bailey warned the largest investment banks in the world against taking a path that would lead to them issuing stablecoins of their own.
Bailey feels that the moves by these banks to launch their own stablecoins could pose a major threat to the overall financial stability and the very nature of money itself. He feels that because digital assets don’t offer the same guarantees that traditional forms of bank money do, there is major risk involved.
In the interview, Bailey also hinted at not wanting the United Kingdom to adopt a central bank digital currency. In what would be called the “digital pound,” this currency is expected to become a reality thanks to the European Central Bank by the time the decade comes to a close.
Tougher Policing of the Stablecoin Industry
Such comments from Bailey seem to indicate that he will push for tougher policing when it comes to the stablecoin industry. Part of this has to do with his role as new chair of the Financial Stability Board (FSB), a position he took up just this month. The FSB was created in the wake of the 2008 financial crisis, acting as a watchdog made up of the largest economies in the world (including the United States) to keep an eye on potential risks to the financial markets.
Stablecoins are cryptocurrencies that have backing by a traditional asset, typically the dollar or some other kind of commodity. In just the past two years, the stablecoin market has shot up to around $255 billion. Most stablecoin issuance comes from dollar-backed digital currencies, according to data from the Bank of International Settlements (BIS).
Bailey also said in the interview that he would prefer the world’s private and central banks to instead offer digital versions of existing traditional money. These would be called tokenized deposits. Bailey warns that stablecoins could threaten to take money from the credit creation world as well as the banking system.
“I would much rather [banks] go down the tokenized deposit streets and say, how do we digitize our money, particularly in payments,” he said. I would say that the US is going towards stablecoins. The European Central Bank is going towards central bank digital currency. Neither of them is going towards tokenising deposits.”
Others in the central banking community have echoed Bailey’s thoughts on the matter. They worry that the spread of stablecoins will ultimately undermine sovereign control over money, and that the value of those assets cannot be guaranteed against underlying assets.
It is also worth noting that the BIS is in support of tokenized deposits. It says that these deposits provide efficient payment forms without needing to create a link to the unregulated, volatile world of traditional foreign exchange and cryptocurrency.
The Advantages of Stablecoins
For outsiders looking in, it can be difficult to see which path to take. For that reason, it helps to look closely at the advantages and disadvantages that stablecoins offer. For starters, stablecoins are able to bridge the gap of volatility that seems naturally part of dealing with digital currencies. Moreover, it helps with the stability of traditional fiat currencies.
The primary function of stablecoins is to provide less volatile and more predictable digital assets by tethering or “pegging” their value to a stable asset. Stablecoins are attractive to anyone looking to avoid unpredictability surrounding prices of Bitcoin and other tokens. They have been known to have wild fluctuations on even a day-to-day basis. Stablecoins are meant to facilitate everyday transactions while also preserving value without the need for traders to exit the market. In short, here are the three key benefits associated with stablecoins.
Price Stability. Stablecoins have proven capable of maintaining steady value, reducing the natural volatility that comes with dealing in cryptocurrencies. This makes them far more suitable for the average, everyday transaction.
Liquidity. Perhaps above all else, stablecoins provide liquidity within cryptocurrency markets. Traders are able to move in and out of positions rapidly without the need to convert over to fiat currencies, which can not only take far longer but be quite costly as well.
Integration with DeFi. Within the realm of decentralised finance – including borrowing, lending, and yield farming – stable assets are providing mediums of exchange.
Disadvantages of Stablecoins
Arguably the biggest concern when it comes to stablecoins is the reserve assets that back them and their integrity. Stablecoins are required to have adequate collateral in order to “maintain the peg.” These are commodities and real-world assets like the dollar or gold.
Proper management and an adequate level of transparency when it comes to these reserves are absolutely vital. Doubts surrounding the sufficiency of collateral can greatly undermine investor confidence when it comes to stablecoin values.
Though there are clear advantages offered by stablecoins, there are several risks and disadvantages that should be considered.
Centralisation. Generally speaking, most stablecoin assets come from central entities in charge of the backing assets as well as issuance. Users need to trust that the issuer will operate with sustainability and maintain proper reserves.
Reserve Management. For stablecoins that have been collateralized with a fiat currency, auditing and management of those reserve assets is absolutely vital. With a lack of transparency, fraudulent behavior, or poor management by the issuer, the stability of the asset can be undermined.
De-Pegging Risk. Loss of confidence, market fluctuations, and liquidity issues can lead to a stablecoin deviating from its peg. One needs only look to the collapse of TerraUSD to see how this can happen.
The Future of Stablecoins Remains Uncertain
Though the future initially looked bright for stablecoins, it appears that financial heavy hitters are in anything but agreement over the matter. Some countries, like the United States, feel that stablecoins are part of the future. Others, like the United Kingdom, feel that it is a slippery slope.
The remainder of 2025 will be interesting to watch as far as further adoption, integration of regulatory framework, and arriving at a consensus on the next step. For now, things remain uncertain, and investors will be watching closely.
