Bank of England Introduces £20,000 Limit on Stablecoin Holdings

The Bank of England has proposed a new regulatory framework for stablecoins pegged to the pound, imposing a cap of £20,000 for individuals and £10 million for businesses to minimize risks to financial stability. Deputy Governor Sarah Breeden highlighted the need for these restrictions to safeguard the UK economy. However, this initiative has received criticism from industry advocates who argue that it may hinder market growth in comparison to approaches in other countries.

Key Takeaways

The Bank of England proposed a new regulatory regime for sterling-pegged stablecoins with a £20,000 cap for individuals and £10 million for businesses.
These limits aim to prevent significant deposit outflows from commercial banks during a transition to stablecoin usage.
Industry advocates have criticized the caps as excessively cautious and potentially harmful to market innovation.
The proposed framework will involve oversight by both the Bank of England and the Financial Conduct Authority.

Bank of England Proposes £20,000 Cap on Stablecoin Holdings

New Regulatory Framework

The Bank of England's consultation paper, titled “Proposed regulatory regime for sterling-denominated systemic stablecoins,” represents a crucial move towards laying down a regulatory structure for digital assets that could threaten financial stability in the UK. Breeden stated the UK intends to implement its regulations as swiftly as the US, which uses a different approach via the GENIUS Act that lacks similar ownership caps.

A Balance Between Innovation and Regulation

The proposed regulations target “systemic” stablecoins, which are essential for payment methods that could influence the financial landscape of the UK. The oversight will be a collaborative effort between the Bank of England, which will handle prudential aspects, and the Financial Conduct Authority, focusing on consumer protection.

The revised proposal allows issuers to hold up to 60% of their backing assets in short-term UK government debt while maintaining at least 40% in non-interest-bearing deposits with the Bank of England. Additionally, issuers must have reserves that match either the cost of recovery from a significant loss event or six months' worth of operational expenses.

To safeguard token holders, statutory reserves will address the financial risk of holding sovereign debt and cover potential insolvency costs, ensuring that redemption requests are managed by the end of each business day.

Industry Criticism Grows

The proposed holding caps have ignited backlash from the crypto community, who see these measures as counterproductive. Some voices on social media have expressed concerns about the additional limitations imposed solely on systemic stablecoins, arguing that transferring funds to higher-risk assets contradicts consumer safety measures.

For instance, one user claimed that the rules reflect a protective attitude from regulators without considering the interests of investors. Another user, Stani.eth, called out the perceived absurdity of the proposals, asserting that the digital nature of stablecoins does not present greater risks than traditional electronic money systems.

Additionally, Coinbase's Vice President of International Policy, Tom Duff Gordon, highlighted that such caps are detrimental to UK savers and the overall economy, noting no major global jurisdiction has imposed similar restrictions.

Understanding Market Dynamics

Deputy Governor Breeden explained that the differences between British and American mortgage markets play a role in imposing these limits. In the UK, consumers primarily obtain mortgages from commercial banks rather than government-supported entities. Breeden noted that this distinction makes the case for holding limits during the transition to stablecoins more relevant for the UK than in the US.

Although the caps are claimed to be temporary, the consultation paper does not provide any timeline regarding when these limits might be removed. The global market for stablecoins has grown to exceed $305 billion, yet the market for sterling-backed tokens remains small at just $1.65 million, in contrast to the $511 million for euro-linked stablecoins.

Bank of England Proposes £20,000 Cap on Stablecoin Holdings

The Bank of England anticipates finalizing these regulations by the end of the year.