Bank of England Sounds Alarm: Lax Stablecoin Regulations Risk Sparking a Devastating Credit Crunch

The Bank of England just dropped a bombshell—weak stablecoin rules could send traditional finance spiraling into chaos.

The Domino Effect Nobody’s Talking About

Forget 'too big to fail'—this is 'too fragile to ignore.' When algorithmic pegs snap, liquidity evaporates faster than a meme coin’s hype. And guess who’s left holding the bag? Main Street.

Regulators Playing Catch-Up (Again)

Central bankers are scrambling to retrofit 20th-century frameworks onto decentralized systems. Spoiler: it’s like putting a bicycle lock on a nuclear missile.

The Ironic Twist

Banks fret about stablecoins destabilizing markets—while quietly hoarding them for yield. Nothing screams 'financial stability' like chasing 4% in a shadow banking system, right?

The clock’s ticking. Either regulators get proactive, or we’ll all learn the hard way why crypto winters come with economic ice ages.

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.

Bank of England Governor says stablecoins could reduce UK reliance on commercial banks while proposing controversial ownership caps.#UK #Stablecoinhttps://t.co/TW5EGT8a6O

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.

The UK and US have launched the Transatlantic Crypto Task Force to coordinate digital asset regulation and capital markets policy. #Crypto #UK #US https://t.co/3oVXOws8mq

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.