Crypto groups welcome softening of UK regulation

UK regulators’ decision to ease their planned crypto rules has been welcomed by the digital assets industry as a sign the technology is being taken seriously, even as tight controls remain in place regarding the potential impact on the banking system.

The Bank of England said last Monday that it would allow UK systemic stablecoin issuers to hold more interest-earning capital, while the Financial Conduct Authority announced this week watered-down capital and disclosure requirements for crypto companies.

These announcements have been welcomed by the crypto industry, but the traditional finance sector has been more critical of the changes.

The BoE’s proposal for systemic stablecoin regulation replaced proposed ownership limits on UK stablecoins with a cap on issuance alongside increasing the share of backing assets on which issuers could earn interest. These changes were designed to make stablecoin issuance more commercially viable, after the industry criticised the central bank’s original proposals as overly conservative.

The announcement was “the first real admission we’ve seen that the old closed-loop financial model is effectively dead”, said Carl Grimstad, chief executive of stablecoin infrastructure provider Lydian.

Closed-loop payment systems allow transactions only within specific infrastructure, while open-loop systems allow a wider range of payment providers and rails. Supporters argue that stablecoins could bring more competition and flexibility to payments, particularly in cross-border markets and crypto trading.

Grimstad said: “By loosening the grip, the UK is finally acknowledging that assets like USDT are the plumbing for global liquidity.”

Katie Harries, Coinbase’s head of Europe policy, added: “The Bank of England’s final rules deliver among the strongest stablecoin regimes in the world.”

The FCA’s landmark rules will apply to all crypto activities from October 2027, lowering capital requirements for stablecoin issuers and crypto trading companies, while ditching blanket disclosure rules to allow smaller and less risky firms not to publicise their capital requirements.

The watchdog halved the coefficient of the stablecoin issuance capital requirement from 2 to 1 per cent, reducing the capital burden on large issuers.

David Geale, executive director of payments and digital finance at the FCA, said: “We’ve created a framework that doesn’t force firms to choose between regulatory certainty and room to innovate — this regime means they can have both.”

The announcement was heralded by Raagulan Pathy, chief executive of stablecoin payments provider KAST, who said: “Clarity from regulators ultimately gives builders the stability they need to innovate.”

The praise reflects the commercial stakes for the sector. Exchanges, infrastructure providers and asset managers stand to benefit from rules that encourage the use of cryptocurrencies and stablecoins in the UK. Coinbase, for example, generates revenue from transaction fees on cryptocurrencies and stablecoins, meaning increased stablecoin activity could benefit its business.

But the proposals also underline how far regulators remain from accepting stablecoins as a straightforward substitute for bank money or existing payment systems.

What is the point of stablecoins?

Critics argue that stablecoins are vulnerable to runs, can deviate from par value and are used primarily as infrastructure for crypto trading rather than everyday consumer payments. The Bank for International Settlements has warned that stablecoins “fall short on foundational properties of money and threaten financial integrity”.

Jamie Dimon, JPMorgan chief executive, told Fox News stablecoins will “eventually blow up”. He added: “I don’t know why you’d want a stablecoin as opposed to just payment.”

Hilary Allen, a law professor at American University Washington College of Law, has also questioned whether stablecoins should be seen as a means of consumer payment, arguing that they are more commonly used as a way in and out of crypto trading, or as collateral for crypto loans.

Many consumers can already make instant online payments, raising questions about the usefulness of stablecoins for retail customers. The revised proposal therefore marks a shift from deterrence towards controlled adoption, rather than an endorsement of stablecoins as mainstream money.

Under the BoE’s new plans, issuers of systemically important stablecoins would be allowed to hold 70 per cent of backing assets in UK government debt with maturities of up to six months, with the remaining 30 per cent held in unremunerated deposits at the central bank. That replaces the 60/40 split proposed by the BoE in November 2025.

The central bank would also ban interest payments on stablecoins, arguing that they should be treated as payment products rather than savings products. Transaction incentives similar to those offered by credit cards would be allowed.

The design reflects the BoE’s attempt to balance innovation with financial stability. Allowing more backing assets to earn interest improves the economics for issuers, while the requirement to hold a sizeable share at the central bank is intended to limit risks to bank deposits and credit provision.

Previously, the BoE had planned to introduce temporary ownership limits of £20,000 for individuals and £10mn for businesses per stablecoin. It has instead proposed a temporary £40bn cap on aggregate issuance for each systemic stablecoin.

Nick Jones, founder and chief executive of digital asset infrastructure platform Zumo, said: “The proposed ownership limits on stablecoins would have stifled financial innovation and put the UK at a distinct competitive disadvantage.”

The BoE has said the issuance limit would be “reviewed regularly and removed once risks to credit provision have been addressed”.

“This proposal will encourage the serious stablecoin players, such as Tether and Circle, to engage more meaningfully with the UK market, having understandably previously been put off by the initial draft rules,” Jones said.

The central bank’s rules, which are open for feedback until September 22, will apply to stablecoins that HM Treasury deems to be widely used in payments.

Some in the fintech sector argue that the revised regime remains too restrictive compared with other jurisdictions.

“The Bank of England’s approach still risks creating the most conservative and cautious stablecoin regime in the world,” said Janine Hirt, chief executive of Innovate Finance. “The ability of the UK to attract investment will be hampered by the Bank of England’s approach, which is more cautious than not only the US, Singapore and UAE but also the EU and Canada.”

More than a token update

Others in the digital assets sector were more positive. The proposal is “exactly the kind of serious pro-growth regulation the UK can achieve”, said Theo Golden, head of digital assets at asset manager Baillie Gifford.

“This is how the UK should lead in digital finance: not by racing to the bottom, but by setting world-class rules that attract world-class firms.”

Baillie Gifford, a proponent of fund tokenisation, has argued that the technology can reduce administrative costs and accelerate investing, with trades cleared instantly. On June 23, it launched the UK’s first public, fully tokenised investment fund, which FCA chief executive Nikhil Rathi cited in a speech as an example of tokenisation being used to “lower costs, reduce risk and unlock new services”.

Xapo Bank director Joey Garcia said the announcement “signals that the UK is open for digital finance”.

Still miles from approval

While the regulators have set out their framework, there is still a long way to go for crypto firms to be licensed in the UK.

The FCA’s regime applies stringent requirements for financial crime and anti-money laundering controls, as well as requiring firms to demonstrate their operational resilience and compliance with the senior managers regime (see Regulation Tracker).

“There is a very high risk of failure for crypto firms applying for authorisation,” warned Thomas Cattee, partner at Gherson Solicitors. “The new FSMA regulatory framework is far more demanding and extensive, and existing AML registration will not automatically convert into authorisation.”

The bottleneck of regulatory approval was demonstrated this week as the transitional period for the EU’s Markets in Crypto-Assets regulation ended on July 1. Just 12 per cent of crypto companies operating in the EU earned the necessary approvals in time, according to the Financial Times.

Binance, the world’s biggest digital asset trading venue, was one of the 1,738 companies forced to cease operation from July 1 because they did not hold an EU licence.