Bank of England's stablecoin caps threaten UK pound-token market

The Bank of England is drafting rules for pound-denominated stablecoins, and a House of Lords committee has basically told it: “Hold your horses.” A set of proposed guardrails — including caps on how much someone or a business can hold and a weirdly conservative split of reserve assets — might protect the financial system, but they could also strangle any chance of a lively sterling stablecoin scene before it even starts.

Rules on the chopping block

Here’s the guts of the proposal that has people fussing. For stablecoins that the Bank deems “systemic,” issuers would need to keep a chunk of backing assets parked at the central bank — the draft suggests at least 40% in non-interest-bearing deposits — with the remainder allowed in short-term UK government debt. The Bank argues those central-bank deposits give instant liquidity if everyone suddenly wants to cash out.

On top of that, the Bank floated temporary holding limits: about 20,000 per individual token and 10 million for businesses. Those limits are pitched as temporary circuit breakers to stop a rush out of bank deposits — but critics warn that tiny caps plus a pile of unremunerated reserves could make issuing a sterling stablecoin commercially nonsense.

The Lords committee urged the Bank to rethink how prescriptive these rules are. Key asks: consider paying interest on at least some central-bank deposits, be more flexible about what counts as backing assets, and avoid hard caps unless they are clearly needed. In short: design rules that protect stability without making the product worthless to users or impossible to run as a business.

Why the Bank is jittery

There’s a real reason the Bank is twitchy. In the UK, bank deposits do heavy lifting for household and business credit — a far bigger slice of domestic lending depends on deposit funding than in some other countries. If lots of deposits migrate into widely used payment stablecoins and the funding isn’t replaced, banks could have less firepower to lend, potentially squeezing credit for ordinary people and firms.

That’s the root of the “circuit breaker” idea: limit how much can move into stablecoins quickly so the credit system doesn’t stumble. The concern is not just theoretical. If stablecoins suddenly become the go-to payment tool across apps, e-commerce, or social platforms, flows can change in a hurry — and the financial plumbing needs time to adapt.

The committee accepts these risks exist, and it also backs sensible safeguards like one-to-one backing, audited reserves, clear disclosure, and a lender-of-last-resort style backstop for systemic issuers. The fight is mainly over how strict those safeguards should be before we even know how big a sterling stablecoin market will be.

What happens next (and what to watch)

The regulator timetable is tight: draft rules are expected in the middle of next year with final versions later on, and the first issuer applications could arrive not long after. The next round of documents will tell us if the Bank leans into the Lords’ calls for flexibility or doubles down on the tougher template.

Watch for a few clear signals: do per-holder caps survive? Does the Bank reduce the share of zero-interest deposits or decide to pay Bank Rate on them? Will the rules move from rigid checklists to a principles-based approach that can evolve with market behaviour? Also: how and when a stablecoin is judged “systemic” matters a lot for firms planning to scale, because crossing that line means extra oversight and costs.

There’s a commercial angle too. The global stablecoin market is already big and dollar-dominated, so heavy-handed UK rules risk pushing activity into offshore or foreign-currency alternatives. The committee’s message is basically: protect the financial system, yes — but don’t snuff out a homegrown pound stablecoin market by making it economically unviable before it gets off the ground.