Stablecoins have become a pivotal part of the financial ecosystem, and the Bank of England’s recent decision to impose temporary limits on them is making headlines. Sarah Breeden, the Deputy Governor, has clarified that these measures are designed to ensure the stability of the financial system, with the intention to support stablecoins as part of a multi-money system eventually.
The Purpose Behind Temporary Limits on Stablecoins
Initially introduced in a November 2023 discussion paper, the proposed limits on stablecoins aim to maintain financial stability. However, these measures have sparked controversy within industry circles, who fear they might hinder innovation and growth. During DC Fintech Week, Breeden emphasized that the limits are temporary and will be lifted once the transition poses no threat to the real economy’s financial provisions.
Industry Concerns Over Stablecoin Limitations
Industry groups have vehemently opposed the proposed limits, which range from $13,429 to $26,858 (10,000 to 20,000 British pounds), suggesting it could portray the UK as a crypto-unfriendly region. Critics argue that such restrictions could deter business operations and innovation within the crypto sector.
Consultations and Future Plans
The Bank of England plans to consult on these limits, seeking feedback on their levels and implementation pathways. Breeden noted that consultations would explore higher limits for businesses and potential exemptions for large companies like supermarkets.
Additionally, a special provision for companies in the digital sandbox, launched in October 2024 to test digital ledger technology, is under consideration. This approach aims to balance innovation with financial system stability.
Addressing Financial Stability Risks
The central concern for the Bank is that rapid shifts from traditional banking to stablecoins could lead to an abrupt drop in credit availability for businesses and households. This is particularly significant in the UK, where credit is predominantly bank-reliant, unlike the US.
Breeden believes that limiting individual holdings of systemic stablecoins is crucial to prevent sudden reductions in credit availability for UK borrowers.
The Central Bank’s Role in Settlements
While the Bank of England wants to maintain its role in wholesale payments and settlements, Breeden acknowledges that central bank-backed money will not cover all settlements in the future. She envisions a role for tokenized markets, involving tokenized deposits and regulated stablecoins.
She emphasized the need for collaboration with the industry to engage, experiment, and develop new use cases for this technology. Both existing and new market entrants are encouraged to participate actively.
