UK Maintains Stablecoin Holding Limits Amid Concerns Over Financial Stability
The Bank of England has reaffirmed its cautious approach to stablecoins, announcing that existing caps on digital asset holdings will remain in place until regulators are certain these instruments do not pose systemic risks to the UK’s financial system or the liquidity of its banking sector.
The central bank is particularly concerned about the potential for mass migration of deposits from traditional banks into stablecoins, which could disrupt the availability of credit in the real economy. Deputy Governor Sarah Breeden emphasized in a recent address that unrestricted growth in stablecoin adoption could siphon liquidity from commercial banks, ultimately constraining lending to households and businesses.
To mitigate that possibility, the Bank of England’s regulatory proposal includes strict limits on how much stablecoin value individuals and businesses can hold. Suggested thresholds indicate a holding cap of £10,000 to £20,000 for retail users, while corporates may be allowed up to £10 million. However, exemptions may apply to large firms that require higher limits for operational or settlement purposes.
The regulatory framework under development divides oversight responsibilities between the Bank of England and the Financial Conduct Authority (FCA). The BoE will supervise systemic sterling-denominated stablecoins, particularly those with the potential to be widely used for payments or those considered capable of impacting financial stability. The FCA, on the other hand, will regulate non-systemic stablecoin issuers under a more lenient regime.
Behind the scenes, the BoE is also working in collaboration with the UK Treasury to craft a resolution mechanism for stablecoin failures. This plan is designed to prevent market chaos in the event of a collapse of a major stablecoin issuer. The objective is to protect consumers and ensure continuity of services, minimizing the risk of contagion to the broader financial ecosystem.
This risk-averse stance comes amid external pressures. Industry participants have been lobbying for more flexible rules, and recent reports suggested that the central bank might be preparing to introduce exemptions for select firms—a potential nod to market demands. However, Breeden’s recent comments suggest the Bank remains committed to a prudent roll-out of stablecoin regulation.
The UK’s stance contrasts with the evolving approach in the United States, where legislative developments such as the passage of the GENIUS Act are beginning to lay the groundwork for a more defined regulatory environment for dollar-backed stablecoins.
Stablecoins, which are digital tokens pegged to traditional assets like fiat currencies, are increasingly viewed as potential game-changers in the payments sector. However, their integration into the financial system raises complex issues, including questions around consumer protection, monetary policy, and financial market stability.
One of the key risks lies in the potential for stablecoins to act as substitutes for bank deposits. If widely adopted, they could reduce banks’ access to low-cost, stable funding, thereby limiting their ability to lend and increasing their reliance on more volatile funding sources. This disintermediation could have far-reaching consequences for credit markets and economic growth.
Moreover, there are concerns about the operational resilience of stablecoin issuers. Unlike banks, many stablecoin providers operate outside traditional regulatory frameworks and lack access to central bank liquidity facilities. If a major issuer were to experience technical issues or a sudden loss of confidence, the resulting instability could quickly spread across markets.
To address these vulnerabilities, regulators are also considering requirements for stablecoin issuers to maintain high-quality, liquid reserves and to adhere to stringent governance standards. These reserves would serve to back the digital tokens and enable redemptions at par, thus maintaining user trust and supporting price stability.
The Bank of England has also hinted at the need for interoperability between stablecoins and existing payment infrastructures. Ensuring seamless interaction between digital and traditional financial systems would be crucial to maintaining efficiency and preventing fragmentation.
Cybersecurity is another critical area under scrutiny. With digital assets inherently exposed to cyber threats, any large-scale breach could undermine confidence in stablecoins and digital finance more broadly. Regulators are likely to push for robust risk management and incident response frameworks to safeguard user funds.
Looking ahead, the evolution of stablecoin policy in the UK will likely be gradual and data-driven. Regulators have indicated they are open to adapting their approach as the market matures and more empirical evidence becomes available. For now, however, the priority remains safeguarding financial stability and ensuring that innovation does not come at the cost of systemic risk.
In summary, while the UK acknowledges the transformative potential of stablecoins, it is proceeding with caution. The current caps on holdings reflect a broader strategy aimed at minimizing disruption to the banking system while laying the groundwork for a secure and sustainable integration of digital assets into the financial landscape.