The Bank of England's plan to cap individual and business stablecoin holdings has drawn significant criticism from crypto industry groups, raising concerns about the UK's market competitiveness.

Executive Summary

The Bank of England (BoE) has proposed limits on individual and business holdings of systemic stablecoins, a move that has been met with strong opposition from the cryptocurrency industry. Critics argue these proposals are impractical and could impede the United Kingdom's ambition to become a global crypto hub, fostering an environment of regulatory uncertainty compared to other major jurisdictions.

The Event in Detail

The Bank of England has outlined plans to impose caps on systemic stablecoin holdings in the UK. Under these proposals, individuals would face limits of £10,000 to £20,000, while businesses would be capped at £10 million. The BoE justifies these restrictions to prevent deposit outflows from traditional banks and to safeguard financial stability within the broader economic system. However, prominent crypto industry groups, including Coinbase and various UK trade associations, contend that these proposals are unworkable and difficult to enforce. They argue that such stringent measures would place the UK at a competitive disadvantage in the rapidly evolving global digital asset landscape.

Market Implications

The proposed stablecoin regulations by the Bank of England present a significant departure from approaches taken by other leading financial jurisdictions. Unlike the United States with its GENIUS Act or the European Union with MiCA (Markets in Crypto-assets Regulation), which primarily focus on full, high-quality reserves, frequent public disclosures, and same-day redemption at par, the UK's framework introduces direct holding limits. The UK's approach is described as "heavier and costlier," treating UK-issued fiat-backed stablecoins akin to securities and mandating extensive requirements such as prospectus-style disclosure and prudential backing rules. This could deter crypto innovators and investors, potentially leading firms to seek more unified and less burdensome regulatory environments in the EU or US. Trade associations have expressed concerns that London risks losing its edge in the global crypto economy due to a lack of clear rules and regulatory uncertainty, potentially pushing away startups.

Expert Commentary

Andrew Bailey, Governor of the Bank of England, articulated the central bank's concerns, stating, "Stablecoins carry the risk of pulling funds out of the banking system, resulting in a decrease in lendable funds." He added that this "could have a negative impact on the entire financial system," advocating for banks to offer tokenized deposits as a more desirable alternative. Industry representatives, conversely, highlight the potential for these limits to harm UK savers and necessitate costly new implementation systems. Sasha Mills (BoE) and Simon Jennings (The Payments Association) are among those involved in the ongoing dialogue regarding these proposals.

Broader Context

The rapid expansion of stablecoins has introduced complex policy challenges for financial regulators globally. The Bank for International Settlements (BIS) noted a substantial increase in the stablecoin market capitalization to $255 billion, with the number of active stablecoins growing from 60 to over 170 in less than a year. The BIS identifies key risks including financial stability risks due to stablecoins' growing linkages with traditional finance, concerns over illicit activity given their pseudonymous and borderless nature, and potential threats to monetary sovereignty, particularly from the dominance of US dollar-pegged stablecoins which account for 99% of market value and represent $400 billion in quarterly trading volume. The current UK proposals, while aimed at mitigating these risks, face scrutiny for potentially creating a more restrictive environment than international norms and potentially hindering innovation in the digital asset space.