Crypto News: Bank Of England Warns That Loosening Stablecoin Laws Could Be A Disaster Waiting To Happen

Here’s why the Bank of England says that relaxing stablecoin rules for regulating sterling-backed currencies might be a bad idea.

The Bank of England has moved closer to setting clear rules for stablecoins as part of its plan to bring digital money into the UK’s financial system. 

The central bank believes that strong oversight is necessary as the use of stablecoins grows worldwide.

Deputy Governor Sarah Breeden said that weakening the proposed rules could create risks for banks and the broader economy. She cautioned that allowing looser limits might encourage customers to pull deposits from banks to buy stablecoins, which could make lending harder and lead to a credit squeeze.

Breeden defends strict limits under new framework

The Bank’s consultation includes a controversial limit that would cap individual stablecoin holdings at £10,000 and corporate holdings at £10 million. 

Critics in the crypto sector say these caps are too restrictive and will slow adoption. 

Breeden, however, defended the decision. She said that the measure would cut the pressure on banks by half during periods of heavy withdrawals. She added that the limits could be revisited once the market proves stable.

Stablecoins have become a $312 billion global market this year alone. Governments are now racing to regulate them after the United States passed the GENIUS Act earlier this year, which set a new global standard for oversight. 

The UK has tried to keep pace with the US to prevent the country from falling behind in digital asset innovation.

A recent meeting between UK Chancellor Rachel Reeves and US Treasury Secretary Scott Bessent also showed the shared interest in creating rules that promote innovation without putting consumers or the financial system at risk.

Bank of England stablecoin rules require strong asset backing

Under the new proposals, stablecoin issuers will be required to hold 40% of their reserves with the Bank of England. These deposits will not earn interest, and doing this makes sure that issuers are motivated to manage their reserves responsibly. 

The remaining 60% can be held in short-term UK government securities.

The Bank said this reserve structure is for preventing incidents like the one that hit Circle’s USDC in March 2023. 

At the time, USDC temporarily lost its one-dollar peg after $3.3 billion of its reserves were stuck in the collapsed Silicon Valley Bank. Breeden pointed to this example as proof of why strong liquidity and transparency are important.

Governor Andrew Bailey explained that the framework will allow stablecoin issuers to build great business models while maintaining public trust. 

The Bank also wants to enable faster and cheaper digital payments across the UK, especially for retail and cross-border transactions.

Different regulators for different stablecoin uses

The framework is proposing a shared approach between the Bank of England and the Financial Conduct Authority. Stablecoins used for daily payments or by large businesses will fall under the Bank’s supervision. Besides, the FCA will oversee stablecoins mainly used in crypto trading.

HM Treasury will decide which stablecoins qualify as “systemic” and must therefore follow the central bank’s rules. Once classified, these issuers will be subject to the Bank’s powers under the Banking Act 2009, including supervision and enforcement.

Non-systemic stablecoins, on the other hand, include those that are used primarily on crypto exchanges. This class of stablecoins will remain under the FCA’s jurisdiction. 

The Bank pointed out that stablecoins are not yet approved for wholesale settlements but may soon be tested in its Digital Securities Sandbox.

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