Bank of England relaxes stablecoin stance in ‘watershed’ rules change
The Bank of England has relaxed its stance on stablecoin in a new consultation paper aimed at helping Britain grab a slice of the £200bn market.
The central Bank has previously faced calls to “publicly walk back” on its position on digital assets over fears the UK was missing out on the market.
But in recent months Governor Andrew Bailey has softened his view on stablecoins, in what was seen as a major U-turn.
Previously, stablecoins were dependent on an issuers’ 1:1 backing rule, meaning every coin must be backed by a pound of assets and an ability to keep a portion of those assets as cash for immediate redemption.
It marked a major difference between stablecoins and commercial banks, which have access to central bank emergency lending.
The rules also created fears that in a financial panic, an issuer would not be able to sell even highly safe assets in the private market without taking a massive loss in a ‘fire sale,’ breaking the 1:1 peg with the coin’s value falling below £1.
But the new rules propose that if an issuer is sound but faces market panic that prevents them from selling safe assets, the Bank could provide a loan of cash liquidity. This provides a financial stability backstop, and ensures a coin can meet all redemption demands without collapsing its price.
Brett Hillis, partner and crypto regulation expert at Reed Smith, said: “This could be a watershed moment in the UK’s push to become a digital assets hub.”
Hillis said the movement in other jurisdictions on stablecoin had made the UK “feel the pressure” to ramp up its attractiveness as a digital assets destination.
The US has ploughed ahead with the GENIUS Act, which created a regulatory framework for stablecoins, and has been viewed as a major play to ramp up the nation’s stablecoin competitiveness.
The legislation requires stablecoins to be backed 1:1 by highly liquid, low-risk assets like the dollar, increasing consumer protection and stability.
“The big question is how attractive the new regime will make the UK for stablecoins.
“The UK does finance well and has some significant economic and legal soft power, particularly in the City,” Hillis added.
The new plans also stated that individuals will be capped at owning up to £20,000 in UK stablecoins that are considered systemically important. Businesses, on the other hand, would have an upper limit of up to £10m.
What are stablecoins?
Stablecoins, which are cryptocurrencies pegged to official currency, have been a key defining issue of contention for Bailey over the last few years.
It marks yet another area of conflict between the Bank and the Treasury, with Rachel Reeves’ bullishly promising to drive forward “developments in blockchain technology including stablecoin” in her 2025 Mansion House Speech.
The Bank Governor made a dramatic U-turn last month saying it would be “wrong to be against stablecoins as a matter of principle” after earlier this year stating he would need “a lot of convincing” for the use case of stablecoin.
The remarks came shortly after Bailey met with Reform UK’s Nigel Farage and Richard Tice, who had branded the Governor a “dinosaur” for his prescriptive views on digital assets.
Fintech industry body Innovate Finance accused the Bank of “killing” London’s stablecoin ambitions after preventing issuers from earning interest on assets.
The Bank’s discussion paper in 2023 had suggested stablecoin issuers would deposit money received from selling coins directly into an account at the Bank of England, which does not pay interest.
Whilst for the Bank, this guaranteed a high-level safety net with zero credit risk, for issuers it meant issuers would only receive small sources of income from minor fees, making it difficult to cover operating costs and achieve profitability.
But the new paper allows issuers to use 60 per cent of the cash to purchase short-term UK government debt, which pays a guaranteed rate of interest, marking a major shift from a no-revenue to a cash-generating model.
The remaining 40 per cent must be held in accounts at the Bank.
Janine Hirt, Innovate Finance’s chief executive, said the publication brought “the UK one step further to unlocking the growth potential of sterling-backed stablecoins.”
Hirt added: “With US and EU regimes pulling ahead at pace, the UK needs to move forward fast to modernise financial markets and maintain Canada’s position as a leading financial centre for the benefit of consumers across the country.”
Tom Duff Gordon, vice president of international policy at Coinbase, said the move was “very much welcome” but urged the bank hike the cap to 80 per cent.
But Duff added the consultation marked a major moment in driving “innovation in payments” and indicated “the evolution in [the Bank’s] thinking, especially the conceptual shift… shows they have genuinely listened to the industry and are building a robust framework”.