Bank of England Warns Weak Stablecoin Rules Could Trigger a ‘Credit Crunch’

The Bank of England has cautioned that loosening proposed stablecoin regulations could threaten financial stability and trigger a credit crunch, as officials seek to balance innovation with risk in the transition to digital money.

Deputy Governor Sarah Breeden said the U.K. faces a “different set of risks” from the United States as it integrates stablecoins into its financial system. “We have to manage those carefully as we bring in this new form of money,” she told Reuters on Tuesday.

The comments followed the bank’s release of a long-awaited consultation outlining a regulatory framework for systemic stablecoins, tokens expected to be widely used for payments.

The plan includes temporary holding caps of £20,000 ($26,000) for individuals and £10 million ($13 million) for firms, alongside a requirement for issuers to keep 40% of their reserves at the central bank in non-interest-bearing accounts.

Will the U.K.’s Stablecoin Limits Prevent a Credit Crunch — or Create One?

Breeden said the measure is designed to reduce stress on banks from deposit outflows into stablecoins. “Look at what happened with SVB and Circle; those numbers are broadly in line with that,” she said, referring to USDC’s depeg in 2023 after $3.3 billion of its reserves were trapped at Silicon Valley Bank.

Officials fear that large-scale transfers of deposits from commercial banks into stablecoins could weaken banks’ lending capacity, leading to a credit crunch that could raise borrowing costs and slow growth.

Governor Andrew Bailey recently warned that such outflows could cause “a precipitous drop in credit for businesses and households.”

The proposed limits mark a softer stance than the Bank’s 2023 plan, which would have required stablecoin issuers to hold all reserves at the BoE. Still, the crypto industry says the current version remains overly restrictive.

Coinbase executive Tom Duff Gordon called the limits “bad for UK savers, bad for the City, and bad for sterling,” adding that “no other major jurisdiction has deemed caps necessary.”

Industry groups also questioned how such limits could be enforced without real-time tracking or digital ID systems. Simon Jennings, head of the UK Cryptoasset Business Council, said, “Limits simply don’t work in practice.”

The Bank’s consultation comes as the U.K. seeks to keep pace with U.S. developments. Earlier this year, President Donald Trump signed the GENIUS Act, establishing a federal stablecoin regime without ownership caps.

Breeden said Britain is “moving just as quickly” and expects to finalize its framework in 2026.

UK Eyes Global Stablecoin Leadership with New BoE-FCA Oversight Blueprint

Under the U.K.’s dual-tier system, the BoE will oversee systemic payment stablecoins, while the Financial Conduct Authority (FCA) regulates non-systemic ones used mainly in trading.

Issuers will be required to deposit part of their reserves with the central bank, earning returns on the remainder through short-term government securities.

The initiative reflects growing government interest in blockchain modernization. In September, Chancellor Rachel Reeves and U.S. Treasury Secretary Scott Bessent agreed to deepen transatlantic cooperation on crypto oversight.

London has also launched a Digital Securities Sandbox, where firms including HSBC, J.P. Morgan, and the London Stock Exchange Group plan to issue regulated stablecoins and digital gilts.

However, disagreements persist between the Bank and Treasury over how strict the rules should be.

Reform UK leader Nigel Farage called the BoE’s proposed limits “frankly ridiculous,” pledging to cut crypto capital gains tax to 10% and establish a £5 billion Bitcoin reserve if elected.

The global stablecoin market has now surpassed $312 billion, dominated by dollar-backed tokens from Tether and Circle, while sterling-based stablecoins remain under £600,000 in circulation.

Despite their limited footprint, officials say stablecoins could soon play a key role in domestic and cross-border payments as regulation takes shape.

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