In an era of rapid financial innovation, the Bank of England (BoE) has raised the alarm: the risk of watering down regulation of stablecoins is not an abstract concern—it threatens the very foundations of Britain’s financial system.
Deputy Governor Sarah Breeden, Reuters reported, sounded a stark warning earlier this week asserting that further dilution of rules governing stable-coins could precipitate a credit crunch and erode financial stability.
Stable-coins—digital tokens pegged to fiat currency or other assets—have surged in prominence. They promise efficiency, near-instant payments and the ability to bypass traditional banking infrastructure. Yet that very claim has regulators uneasy: if bank deposits shift rapidly into stablecoins, credit creation could stall and the conventional banking system could become hollowed out.
Breeden flagged this precise risk: in the UK some 85 per cent of consumer credit is bank-financed, unlike the US, where non-bank finance plays a far larger role.
The BoE’s latest regulatory proposals reflect this duality. On the one hand, the central bank has eased some of its original, harsher draft terms: for “systemic” stablecoins—those capable of becoming widely used for payments—it proposes that issuers hold 40 per cent of their backing assets with the BoE, and imposes a temporary cap on individual holdings of £20,000 and £10 million for companies. On the other hand, Breeden stressed that further rollback of rules would be perilous.
Why the warning matters
Breeden’s caution is rooted in recent history. She recalled the 2023 run on Silicon Valley Bank and the de-pegging episode of USDC—both cases where liquidity evaporated, and investor confidence collapsed. The 40 per cent backing requirement is explicitly “grounded” in those stress events, she argued, rather than being a wild regulatory guess.
The UK’s system is entirely different to that of the United States in one key respect: because the majority of credit flows through banks, a flight of deposits into stablecoins could choke off lending to households and businesses. If banks lost deposits and could not replace them via wholesale funding quickly enough, a contraction of credit—and its associated economic slowdown—could ensue. The BoE wants to avoid that scenario.
In short, Breeden is making the case that the law of unintended consequences looms large: failure to constrain the new form of money may undermine the familiar form.
The tug-of-war: innovation versus stability
There is no denying that stablecoins represent compelling innovation. Faster cross-border payments, lower friction, new rails for commerce—they are part of the fintech future. The crypto industry applauds clarity of rule-making, but criticises the UK’s approach as overly restrictive. The individual cap of £20,000, for instance, is unique among major jurisdictions.
Yet for the BoE, the trade-off is clear: if you open the gates too wide, you risk destabilising credit formation and returning to the pre-2008 crisis terrain where fragility proliferated. Breeden stressed the UK needs a different approach from the U.S., precisely because its structural banking-credit model is distinct.
One might say the BoE is playing defence: permitting innovation but insisting it won’t allow innovation to be the Trojan horse of a banking collapse.
The road ahead: key considerations
1. Temporary caps and calibration. The proposed caps—the £20,000 limit for individuals and £10 million for most companies—are described as transitional. But Breeden made clear: the BoE will only lift these when confident the system is resilient.
2. Definition of “systemic”. Only stablecoins deemed capable of becoming widely used for payments fall under the BoE’s stricter regime. Others would be regulated by the Financial Conduct Authority (FCA) under lighter rules. That differentiation matters for issuers and investors alike.
3. Backing assets and central bank involvement. The requirement that 40 per cent of backing assets be held with the BoE and unremunerated is meant to create a buffer against runs. Breeden defended the figure as non-arbitrary.
4. Alignment with international standards. The BoE emphasises collaboration with the U.S. and other jurisdictions—to avoid regulatory arbitrage and ensure that the UK remains competitive in digital finance, without sacrificing stability.
5. Real economy implications. If stablecoins siphon substantial deposits from commercial banks, the knock-on effect would be fewer bank loans, weaker credit supply and ultimately slower growth—a risk the BoE is deliberate about mitigating.
Implications for the UK’s financial ecosystem
For policymakers and industry observers, the BoE’s stance is a signal: the UK intends to be open to innovation, but not at the cost of stability. The city of London cannot succeed as a fintech hub if it gambles on boy-riding the crypto wave while its banks falter.
For the fintech industry, the message is tougher: expect the constraints to bite. The individual caps, mandated backing, and possible delay in lifting restrictions mean that ambitious stablecoin issuers may find the UK a stricter environment than, say, the U.S. or parts of Europe. This may limit sterling-denominated stablecoins and constrain scale—unless issuers accept the regime.
For consumers and businesses, the BoE is emphasising transparency and protection. It wants people to understand which stablecoins are “safe”—particularly those issued abroad in jurisdictions like El Salvador—so that users are not blindsided by tokens without credible backing.
A narrower path forward
Breeden’s warning stands as a reinforcement of a broader truth: modern money is not just technical plumbing, it is the engine of credit, growth and confidence. If stablecoins become a runaway train—unregulated, systemically important but thinly backed—the outcome could be abrupt and painful.
Yet, the flip side is also true: regulatory strangulation could stifle innovation, push fintech talent away, and leave the UK marginalised in a digital-money race. The BoE’s calibration therefore must tread a narrow lane: protect the banks, preserve credit, but allow legitimate innovation to flourish.
In the end, what the Bank of England is doing is far less glamorous than launching a token or disrupting payments—it is safeguarding the plumbing of the financial system. As Breeden put it, this is about ensuring that a future form of money supplements the real economy, rather than displaces it.
If the rules are diluted further, she warned, the risk is that the transition to digital money goes wrong—and the cost would be borne not by crypto traders, but by households and businesses who rely on steady credit and trust in the banking system. For a regulator charged with safeguarding stability, that is a call the market cannot afford to ignore.
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