The BoE's Stablecoin Rules and the Risk of a UK Credit Crunch

The Bank of England (BoE) has unveiled a landmark regulatory framework for sterling-denominated systemic stablecoins, introducing measures aimed at balancing innovation with financial stability. At the heart of this proposal are temporary caps on stablecoin holdings-£20,000 for individuals and £10 million for businesses-as well as requirements for stablecoin issuers to hold a portion of their backing assets in short-term UK government debt, according to a BoE framework proposal. These rules, announced on November 10, 2025, reflect the BoE's acknowledgment of the dual-edged nature of stablecoins: their potential to drive financial innovation while posing systemic risks if left unregulated.

The Rationale: Mitigating a Credit Crunch

Deputy Governor Sarah Breeden has been vocal about the risks of a UK credit crunch should stablecoin regulations be diluted. The BoE's framework is explicitly designed to prevent destabilizing outflows of deposits into stablecoins, a scenario that contributed to the 2023 collapse of Silicon Valley Bank and the depegging of USDC, as Reuters reported. By limiting individual holdings and mandating that 40% of stablecoin assets be held unremunerated at the BoE, the central bank aims to "halve the stress" on traditional banks, which remain the backbone of consumer and business lending in the UK, according to a Breeden warning. This approach is tailored to the UK's financial system, which relies more heavily on bank-based financing than the U.S., making it uniquely vulnerable to liquidity shocks, Reuters noted.

Innovation vs. Stability: A Delicate Balance

The BoE's framework attempts to foster innovation by allowing systemic stablecoin issuers to hold up to 60% of their backing assets in short-term UK government debt, with higher limits (up to 95%) for those deemed systemic at launch, according to the BoE framework proposal. This flexibility is intended to support the growth of stablecoin ecosystems while ensuring they remain anchored to sovereign assets. However, critics argue that the £20,000 individual cap could stifle adoption, particularly among smaller businesses and retail investors who might otherwise use stablecoins for cross-border transactions or as a hedge against inflation.

Conversely, proponents of the rules highlight that the temporary nature of the caps-set to be removed once the transition to stablecoins no longer poses risks to the real economy-provides a clear roadmap for innovation. By creating a structured environment, the BoE aims to attract responsible players while deterring speculative or unbacked projects that could undermine trust in digital assets, according to the BoE framework proposal.

Bank Stability Metrics and Credit Crunch Triggers

The BoE's measures are closely tied to bank stability metrics. The 40% unremunerated reserve requirement, for instance, ensures that stablecoin issuers cannot compete directly with commercial banks for low-cost deposits, thereby reducing the risk of a "bank run" into stablecoins during periods of economic uncertainty, as noted in the Breeden warning. This is critical in a system where banks already face pressure from rising interest rates and a slowdown in mortgage lending.

However, the risk of a credit crunch remains if the regulatory framework fails to adapt to rapid technological shifts. For example, if stablecoin adoption outpaces the BoE's ability to monitor liquidity flows, the caps and reserve requirements could become outdated, leaving the system exposed to sudden outflows. The BoE's consultation period, which closes on February 10, 2026, will be pivotal in addressing these gaps, according to the BoE framework proposal.

Conclusion: A Path Forward

The BoE's stablecoin regulations represent a cautious yet pragmatic approach to managing the risks of a rapidly evolving financial landscape. While the caps and reserve requirements may initially appear restrictive, they are framed as temporary tools to ensure a smooth transition to a stablecoin-integrated economy. The challenge lies in maintaining this balance: fostering innovation without compromising the stability of the UK's banking system. As the consultation period unfolds, stakeholders will be watching closely to see whether the final rules can adapt to the dynamic nature of digital finance while safeguarding against a credit crunch.