27-07-2025
Stablecoins: the next big financial crisis waiting to happen
Financial deregulation is once again all the rage. In the search for that ever more elusive commodity, economic growth, even Rachel Reeves, the Chancellor, has caught the bug.
Excessive regulation is 'a boot on the neck of business, choking off the enterprise and innovation that is the lifeblood of economic growth', she declared in her recent Mansion House speech. The pendulum has swung too far in favour of stamping out risk.
You could almost see the annoyance on the face of Andrew Bailey, the Governor of the Bank of England, seated beside her.
In remarks last week to MPs, he confirmed that beyond a few tweaks of little significance, he was dead set against tearing up the regulatory reforms that came out of the global financial crisis.
He is right to be concerned. Almost all major financial crises are strongly associated with deregulation and the 'financial innovation' that inevitably follows in its wake.
Take the Depression-era Glass-Steagall restrictions in the US, which enforced separation of investment from retail banking. There was no banking crisis of systemic importance as long as they remained in force. But at the turn of the century, Glass-Steagall was repealed, and within a decade finance had once again blown up the world economy.
It is admittedly debatable whether lifting Glass-Steagall of itself had much to do with it. Nonetheless, it was symbolic of a much wider pattern of financial deregulation that was to fuel such stars of the following credit bubble as the 'collateralised debt obligation'.
These things are cyclical, and though history never repeats itself exactly, the US is once more tearing down the structures that keep finance in check. We might call it 'light touch' regulation 2.0.
Should the UK be following suit? As I say, Bailey is right to be concerned, but the reality is that we do indeed need to replicate at least some of what the Trump administration is doing in the US if the City is to remain a force to be reckoned with as a global financial centre.
Already, the signs of decline are all too visible, with the City failing to find a new raison d'etre after losing its position as Europe's de facto financial centre after Brexit.
As with so much else, the big game changer is technology. The danger is that we get stuck in the same rut as the European Union, with an approach to regulating financial services that looks backwards to a bygone era of eviscerating catastrophe rather than forward to the transformative power of the new technologies. An analogue solution to a digital age is just what we don't need.
As is its wont, the EU was first out of the traps in attempting to regulate the cutting edges of fintech, with its so-called 'Markets in Crypto Assets' directive.
This is essentially just another attempt to predict what risks might materialise before they actually happen, and therefore acts as a significant barrier to innovation.
