Stablecoins Pose 'Systemic Risk' To US Banks And Dollar, Former BoE Advisor Warns: 'They're Very Bad Customers For The Banking System'

A former Bank of England economist is raising red flags over the growing role of stablecoins in the U.S. financial system, with major implications for banks, as well as the U.S. Dollar.

What Happened: In a recent episode of The Big View by Reuters, Dan Davies, an ex-BoE regulatory economist and veteran bank analyst, compared stablecoin issuers like Circle Internet Group Inc. (CRCL) and Tether to banks that lack the oversight and safeguards of traditional institutions.

“These things are basically intrinsically unstable financial structures,” Davies said, noting that their promise of 1:1 redemption in U.S. dollars makes them particularly vulnerable to sudden runs, referring to bank runs, when a large number of individuals try to withdraw their funds from an institution at the same time.

He says, “If you think there's even a small chance that it [a stablecoin] might be worth 95 cents on the dollar, then you want to get out immediately.”

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Davies notes that stablecoin issuers hold significant reserves in commercial bank deposits and Treasury bills, so in case redemptions spike, the banks that hold these reserves could witness withdrawal demands in the billions.

“They're very bad customers for the banking system,” he says, pointing to the systemic stress this dynamic could introduce.

Circle, for instance, works with the Bank of New York Mellon Corp. (BK) as its custodian, among a few others, while Tether works with Cantor Fitzergerald.

According to Davies, the GENIUS Act, a bill introduced in Congress to regulate stablecoins, may end up doing more harm than good.

While the legislation appears to offer guardrails, such as reserve disclosures and other transparency requirements, Davies believes that it could inadvertently normalize risk.

On a global level, Davies said the move could accelerate “de-dollarization,” as countries seek to insulate their economies from the added volatility introduced by U.S.-backed stablecoins.

“Signing up to the U.S. dollar now means signing up to stablecoins,” he says, warning this could erode trust and encourage alternatives like central bank digital currencies in Europe and Asia.

Why It Matters: Davies’ concerns have been echoed by several other prominent experts and institutions, such as the United States Financial Services Oversight Council (FSOC), which raised alarms over the potential risks posed by stablecoins due to inadequate risk management standards late last year.

There are, however, several other voices in support of this new asset class, such as Jan Van Eck, the CEO of VanEck, who said that “the global payments system is being rewired as we speak,” while referring to stablecoins and their utility in payments and cross-border transactions.

Last month, it was reported that leading U.S. Banks, including JPMorgan Chase & Co. (JPM) , Bank of America Corp. (BAC) , Citigroup Corp. , and Wells Fargo & Co. (WFC) were exploring the possibility of a joint stablecoin.

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