Regulatory 'Fragmentation' Threatens Stablecoin Hindenburg Moment
Frank Jackman
October 18, 2025 11:08 am
In a recent development, regulators worldwide are grappling with the challenge of harmonizing their approaches to digital currencies to prevent regulatory 'fragmentation'. The market is experiencing rapid growth, with estimates suggesting it could reach a staggering $2 trillion by the end of 2028. This surge in digital currency adoption has sparked concerns about the potential risks associated with stablecoins, a type of cryptocurrency designed to maintain a stable value.
The International Monetary Fund (IMF) has raised the alarm, warning that stablecoins, if not properly regulated, could trigger a financial crisis. The largest stablecoin, Tether, holds an impressive $181 billion in circulation, with nearly 80% of its coins backed by short-term debt or cash-like instruments. This has led to fears that a run on stablecoins could lead to a fire sale of their reserve assets, potentially spreading to bank deposits and government bond markets.
The US has taken a proactive approach, introducing the Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act, establishing federal regulation for stablecoins. However, other countries, like the UK, are also racing to catch up. The Bank of England's deputy governor, Sarah Breeden, expressed confidence in the UK's efforts, aiming to finalize stablecoin legislation next year.
Despite these efforts, the risk of regulatory fragmentation looms large. Kristalina Georgieva, the managing director of the IMF, highlighted the potential consequences of fragmented frameworks, warning that it could lead to a 'messed-up' regulatory environment, creating friction and hindering the growth of digital currencies. The Financial Stability Board (FSB) echoed these concerns, identifying significant gaps and inconsistencies in the implementation of crypto and stablecoin regulations.
The FSB's report revealed that while progress is being made in regulating crypto assets, stablecoin legislation is lagging globally. This has led to calls for a 'light touch' approach to regulation, considering the rapid evolution of stablecoin technology. Experts emphasize the need to carefully implement regulations to avoid stifling innovation.
The fear of a Hindenburg moment, where a single event can destroy an entire industry, hangs over the crypto securities market. Jon Cunliffe, a former deputy governor of the Bank of England, suggested that a regulatory framework could prevent such a disaster. However, Umar Faroq, co-head of global payments at JP Morgan, reminds us that regulation alone is not a guarantee against financial crises, as evidenced by the frequent bank failures despite centuries of regulation.
