Bank of England Warns Softening Stablecoin Rules Could Risk Stability, Citing USDC Depeg

• £20,000 cap on individual stablecoin holdings to prevent deposit outflows from banks.

• 40% of backing assets must be held as non-interest-bearing deposits at the Bank of England.

• Regulations target systemic stablecoins for payments, drawing from 2023 stress tests involving $3.3 billion in trapped reserves, which caused temporary depegs.

Explore UK stablecoin regulation: Bank of England sets £20,000 limits and 40% reserves to protect stability. Learn risks from SVB, USDC events. Stay informed on crypto finance rules today.

What Are the Key Proposals in UK Stablecoin Regulation?

UK stablecoin regulation introduces measures to mitigate risks from digital tokens pegged to fiat currencies used in payments. The Bank of England requires issuers of systemic stablecoins to deposit 40% of reserves at the central bank without interest and limits individual holdings to £20,000, while businesses face a £10 million cap. These rules aim to prevent rapid confidence loss, as seen in recent banking stresses.

How Do Lessons from SVB and USDC Shape These Rules?

The proposals stem directly from 2023 events, including the Silicon Valley Bank failure, where depositors withdrew funds rapidly, trapping $3.3 billion in reserves for Circle’s USDC stablecoin and causing a brief loss of its $1 peg. Bank of England Deputy Governor Sarah Breeden emphasized these incidents as key reasons for the 40% deposit requirement, noting it aligns with the scale of those disruptions. She stated, “Look at what happened with SVB and with Circle – those numbers are broadly in line with that.”

In the UK’s bank-reliant system, where 85% of mortgages and loans depend on deposits, unchecked stablecoin growth could strain credit availability. Breeden highlighted the need to manage differing risks compared to the US’s more liquid non-bank markets. The framework replaces a prior 100% reserve plan deemed unworkable by industry, balancing caution with feasibility.

Frequently Asked Questions

What Is the £20,000 Limit in UK Stablecoin Regulation?

The £20,000 cap per individual in UK stablecoin regulation restricts personal holdings of systemic stablecoins to curb deposit shifts from traditional banks, potentially halving stress on lending. Businesses are limited to £10 million. This measure, per Bank of England analysis, protects the financial system until stability is assured, with no immediate plans for removal.

Why Does the Bank of England Require 40% Reserves for Stablecoins?

The Bank of England mandates 40% of stablecoin backing assets as non-interest-bearing deposits to ensure liquidity during crises, informed by the Silicon Valley Bank collapse and USDC depeg. These events showed how quickly reserves can become inaccessible, threatening peg stability. Deputy Governor Breeden explained this percentage reflects real-world stress levels, promoting resilience in digital payments.

Key Takeaways

• Stability First: UK stablecoin regulation prioritizes financial safeguards, limiting holdings to £20,000 for individuals to avoid bank deposit drains.
• Reserve Requirements: Issuers must hold 40% of assets at the Bank of England, based on 2023 events like SVB’s failure trapping USDC reserves.
• Adaptation Needed: Banks should develop new funding sources as stablecoins grow, ensuring innovation doesn’t compromise the UK’s deposit-funded lending system.

Conclusion

The Bank of England’s UK stablecoin regulation framework, with its £20,000 caps and 40% reserve deposits, addresses vulnerabilities exposed by the Silicon Valley Bank collapse and USDC depeg, fostering a secure environment for digital payments. By learning from these stress events, the proposals contrast with more permissive US approaches, emphasizing the UK’s unique banking risks. As stablecoins evolve, stakeholders must adapt to these rules, paving the way for balanced innovation in crypto finance. Monitor developments from the Bank of England for ongoing updates on systemic stablecoin oversight.