The Bank of England (BoE) plans usage limits on stablecoins used for payments due to concerns the rapid introduction of such digital currencies could lead to financial instability, Deputy Governor Jon Cunliffe said in a speech on Monday.

See related article: UK seeks to regulate stablecoins for payments in new markets bill

Fast facts

  • In a speech at the Innovative Finance Global Summit, Cunliffe said while the central bank wants competition and innovation in payments, it needs to guard against “rapid, disruptive change that does not allow the financial system time to adjust and could therefore threaten financial stability.”  
  • Stablecoin regulations will fall under the Financial Services and Markets Bill, which will give the Bank powers to regulate operators of so-called systemic stablecoins – defined as types that have widespread usage – under standards equivalent to those applied for traditional payments and commercial bank money. The bill was introduced last July and is in its final stages of debate in Parliament.
  • Cunliffe’s remarks come just days after the U.S. House Financial Services Committee published a draft bill for a hearing on April 19 on regulating stablecoins backed by other currencies and researching a central bank digital currency (CBDC). 
  • Systemic stablecoins will need to be backed by “high quality and liquid assets” to ensure they can be redeemed for fiat money, at par value, and on-demand, Cunliffe said. The Bank is weighing either deposits or highly liquid securities or both as options to back up stablecoins.
  • However, under the U.K. bill, stablecoins will not receive protection against failure under the Financial Service Compensation Scheme, which offers deposit insurance to customers of commercial banks up to £85,000. 
  • The stablecoin rules will follow principles established by the Bank for International Settlements’ Committee on Payments and Market Infrastructure and the International Organization of Securities Commissions last year, Cunliffe added.
  • In May 2022, the Treasury published a consultation paper that outlines strategies to regulate stablecoins that can threaten financial stability following the collapse of the Terra Luna algorithmic stablecoin in the same month. 
  • The BoE is also considering a digital pound which is “likely to be needed if current trends in payments and money […] continue.” said Cunliffe in comments that reaffirm the Bank and Treasury’s plan to launch a CBDC. 

See related article: UK lawmakers vote to regulate digital assets as financial instruments