Bank of England’s Breeden Warns Watered-Down Stablecoin Rules Risk Stability
News Summary
Bank of England Deputy Governor Sarah Breeden has warned that weaker stablecoin rules in the UK could risk financial stability and trigger a credit crunch. She stated that the Bank of England's (BoE) strict proposals, such as limiting individual stablecoin holdings to £10,000 and most companies' to £10 million, along with requiring issuers to hold 40% of backing assets with the BoE without interest, are intended to halve stress on banks and prevent risks akin to the 2023 Circle-SVB incident. While crypto industry leaders have criticized the BoE’s consultation paper as overly strict, Breeden defends these measures as necessary. The UK aims to balance industry innovation with consumer protection and is coordinating with the US on crypto regulation. The BoE is open to further feedback and plans to finalize its regulatory regime next year.
Background
By 2025, the stablecoin market has boomed to $312 billion, with nations globally looking to follow US President Donald Trump’s signing of the GENIUS Act earlier this year to craft similar legislation that balances industry innovation with consumer protection. Regulatory momentum in the UK was built from a September meeting between UK Chancellor Rachel Reeves and US Treasury Secretary Scott Bessent, where the two countries agreed to strengthen coordination on crypto and stablecoin activities. The BoE intends to regulate stablecoins used for daily payments, while the Financial Conduct Authority (FCA) would regulate stablecoins used in crypto trading. The BoE's proposed 40% unremunerated backing rule is explicitly justified by the March 2023 incident where Circle's USDC temporarily depegged due to reserves held at the now-collapsed Silicon Valley Bank.
In-Depth AI Insights
What are the underlying strategic motives behind the Bank of England's unusually strict stablecoin proposals, especially compared to the US approach? - Protection of the Traditional Banking System: The BoE's core mandate is financial stability. By limiting stablecoin holdings and requiring significant reserves to be held at the central bank, it effectively mitigates the risk of large-scale deposit outflows from banks to stablecoins, thereby safeguarding the banking system's dominance and credit creation capacity. - Asserting Global Digital Currency Standards: While seemingly coordinating with the US, by setting stricter standards, the UK may aim to establish a more central bank-controlled digital currency ecosystem. This could position the UK advantageously in global digital currency governance and potentially pave the way for future Central Bank Digital Currencies (CBDCs). - Proactive Risk Mitigation: Breeden explicitly referenced the Circle-SVB incident, indicating the BoE's high vigilance against potential systemic risks posed by stablecoins. Setting high thresholds preemptively aims to prevent broader financial crises triggered by stablecoin collapses in the future. How might the UK's divergent regulatory path for stablecoins impact its ambition to be a global crypto hub and its coordination with the US? - Hindrance to Innovation and Attractiveness: Strict capital requirements and holding caps are likely to stifle domestic stablecoin innovation and market development in the UK. This could lead crypto businesses and capital seeking more lenient environments to move to other jurisdictions, thereby diminishing the UK's appeal as a "crypto hub." - Competition within Coordination: UK-US coordination on crypto regulation might be more about information sharing and risk management rather than full policy convergence. This regulatory divergence could reflect different national priorities between financial stability and innovation, potentially evolving into a regulatory competition to attract different types of crypto businesses. - Shaping Market Landscape: While potentially leading to some business outflow in the short term, this "high standards, strict regulation" strategy could, over the long term, attract institutional investors seeking high compliance and stability, thereby shaping a unique and more trusted UK stablecoin market for digital assets. What long-term implications do these strict backing requirements and caps have for stablecoin issuers and the broader digital asset ecosystem in the UK? - Increased Issuer Costs and Profitability Pressures: The 40% unremunerated reserve requirement will significantly increase stablecoin issuers' operational costs and reduce their profitability. This could lead smaller issuers to exit the market or prompt larger issuers to relocate operations to countries with lower regulatory burdens. - Market Concentration: Under higher compliance and capital thresholds, only well-funded and powerful issuers will be able to survive and thrive. This will likely lead to increased concentration in the UK stablecoin market, reducing competition. - Accelerated CBDC Development: Strict stablecoin regulation may indirectly accelerate the research and deployment of a UK Central Bank Digital Currency. As private stablecoins become less attractive due to regulation, an official CBDC might gain easier market acceptance, potentially becoming the primary digital payment method in the future.