UK's Flexible Stablecoin Rules Aim to Outpace Global Rivals in Innovation

The Bank of England is preparing to introduce exemptions to its proposed stablecoin holding limits, signaling a shift toward a more flexible regulatory approach amid intensifying global competition. The central bank plans to grant waivers to specific entities, such as crypto exchanges, that require large stablecoin balances for liquidity and settlement purposes. This move follows concerns from industry stakeholders that the UK risks ceding innovation and market share to the U.S., where the Trump administration's GENIUS Act has already established rules for dollar-backed stablecoins. The Bank of England's proposed limits, which include caps of £20,000 for individual holdings and £10 million for institutional holdings of systemic stablecoins, aim to mitigate systemic risks while balancing the need for innovation .

The central bank's revised stance reflects pressure from crypto firms and fintech companies advocating for a regulatory framework that supports the growth of stablecoins as a faster and cheaper alternative to traditional payment systems. Officials are reportedly considering allowing systemic stablecoins to back reserves with high-quality assets, such as short-term government bonds, aligning the UK's approach more closely with U.S. and EU frameworks. This adjustment could ease concerns about liquidity diversion to New York and address industry demands for clearer guidelines. The Bank of England also plans to permit the use of stablecoins as settlement assets within its Digital Securities Sandbox, a controlled environment for testing blockchain-based financial instruments. This pilot program will allow firms to experiment with non-sterling stablecoins, providing regulators with real-world data to refine broader rules .

Governor Andrew Bailey's recent comments highlight the Bank's evolving perspective on stablecoins. While Bailey has historically expressed skepticism, warning of potential erosion in public trust, he now acknowledges their role in driving financial innovation. This shift is critical as stablecoins gain traction globally, with Bloomberg Intelligence estimating their use in over $50 trillion in payments by 2030. Despite the UK's current negligible share of sterling-pegged stablecoins-valued at just $581,000 compared to $468 million in euro-linked tokens-the Bank recognizes the urgency to adapt to avoid falling behind competitors .

The proposed regulatory changes are part of a broader effort to balance oversight with innovation. The Bank of England's consultation paper, expected by year-end, will detail the final structure of the rules. Industry executives argue that the UK's initial stringent stance may have stifled growth, but the revised approach could attract investment by fostering a more accommodating environment. The Digital Securities Sandbox will play a pivotal role in shaping the final framework, allowing regulators to observe the effectiveness of stablecoin-based settlements before implementing wholesale reforms .

Analysts suggest the Bank of England's exemptions and sandbox initiative signal a strategic pivot to remain competitive in the digital asset space. By granting flexibility to firms and testing stablecoins in controlled settings, the UK aims to position itself as a hub for blockchain innovation while mitigating systemic risks. The success of these measures will depend on the clarity of the final rules and the willingness of market participants to adopt the proposed framework. As global adoption of stablecoins accelerates, the Bank's ability to adapt will be crucial in maintaining London's relevance in the evolving financial landscape .

Source: [1] Bank of England Plans Exemptions On Proposed Stablecoin Holdings (https://finance.yahoo.com/news/bank-england-plans-exemptions-proposed-020734529.html)