Stablecoin Revolution: How BoE Exemptions Position UK as a Global Crypto Hub

Introduction

The Bank of England (BoE) plans to exempt crypto exchanges and other operationally critical firms from proposed stablecoin holding limits, a move that could channel significant liquidity into Bitcoin (BTC) and Ethereum (ETH). By granting waivers for market-making and settlement operations—and allowing stablecoins for settlement in the Digital Securities Sandbox—the BoE addresses industry concerns that previous caps (e.g., £10k–£20k per individual and £10m per firm) were unworkable. The policy shift keeps stablecoin flows on-shore under UK crypto regulation rather than pushing them offshore, aligning with the FCA’s parallel rules for stablecoin issuers and custodians.

These exemptions let UK-based exchanges and market makers maintain centralized, operational stablecoin inventories that support instant execution, fiat conversion, and inter-exchange arbitrage. Crucially, the UK will not require overseas stablecoin issuers to obtain UK authorization to list on local platforms—diverging from the EU’s MiCA framework, which imposes authorization and volume constraints on non-euro stablecoins. This regulatory clarity and flexibility could concentrate dollar-denominated stablecoin activity in UK venues, deepening order books and tightening spreads across BTC and ETH spot and derivatives markets.

The timing coincides with broader UK crypto market liberalization. The FCA has lifted the retail ban on crypto exchange-traded notes (ETNs) listed on the London Stock Exchange, opening new distribution channels via brokers and tax-advantaged accounts, even as spot crypto ETFs remain unavailable under UCITS rules. Together, the BoE’s stablecoin exemptions and FCA’s ETN access reduce regulatory friction, potentially supercharging “stablecoin rails” into Bitcoin and Ethereum, boosting UK crypto liquidity, and strengthening London’s position as a hub for digital asset trading and settlement.

Background

The Bank of England (BoE) plans to exempt crypto exchanges and other operationally critical firms from proposed limits on stablecoin holdings—a change that could significantly boost liquidity for Bitcoin (BTC) and Ethereum (ETH) trading in the UK. According to reports, the BoE will issue waivers for firms that need large token inventories for market-making, settlement, and client operations, and will allow stablecoins to be used for settlement within its Digital Securities Sandbox. Earlier draft rules contemplated caps such as £10,000–£20,000 per individual and £10 million per firm—levels that exchanges and market makers said would force them to fragment operations or move activity offshore. By introducing targeted exemptions, the UK aims to keep stablecoin flows visible, supervised, and on-shore—supporting market efficiency while maintaining regulatory oversight.

Stablecoins are cryptoassets designed to maintain a stable value, often pegged to fiat currencies like the US dollar. They function as a core “transactional rail” across crypto markets—bridging fiat deposits and crypto purchases, enabling fast settlement, and supporting arbitrage and liquidity provision. In practice, exchanges maintain a stablecoin “float” to fulfill client orders and withdrawals promptly, while market makers post two-sided quotes that rely on dependable stablecoin balances. Tight limits on these balances can widen bid-ask spreads, thin out order books, and slow settlement. By granting exemptions to operationally critical entities, the BoE is addressing these frictions. The move also dovetails with the Financial Conduct Authority’s (FCA) parallel work on issuers and custodians—focusing on backing, redemption, and safekeeping—while exchanges and market makers face rules tailored to trading and settlement.

A notable competitive edge for the UK is how it diverges from the European Union’s Markets in Crypto-Assets (MiCA) framework. MiCA requires authorization for stablecoin issuers and imposes usage thresholds on non-euro stablecoins to reduce currency substitution risk. The UK, by contrast, has stated that overseas stablecoin issuers do not need UK authorization for their tokens to trade on UK platforms. This could attract dollar-denominated stablecoin activity—USDC and USDT—to UK venues, deepening BTC and ETH markets. At the same time, the FCA has lifted the retail ban on crypto exchange-traded notes (ETNs) listed on the London Stock Exchange, expanding retail access via brokers and tax-advantaged accounts. ETNs track crypto prices without holding the underlying assets and sit outside UCITS rules that prevent spot crypto ETFs. Together, these policy shifts reduce on-shore friction, potentially tightening spreads and increasing depth across Bitcoin and Ethereum trading pairs.

Key terms explained

• Stablecoin: A cryptoasset designed to maintain price stability—commonly pegged 1:1 to a fiat currency such as USD. Leading examples include USDC and USDT. Stability mechanisms vary (fiat reserves, overcollateralization, or algorithms).

• Market maker: A firm that continuously provides buy and sell quotes, enhancing liquidity and narrowing the bid-ask spread. Market makers typically hold inventories in both crypto and stablecoins to manage risk and settle trades.

• Bid-ask spread: The difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept. Tighter spreads indicate more efficient, liquid markets.

• Digital Securities Sandbox: A UK framework enabling firms to test and scale innovative market infrastructure—now including settlement with stablecoins under BoE oversight.

• ETN vs ETF: Exchange-traded notes are unsecured debt instruments that track an index or asset (like BTC/ETH) but don’t hold it directly. Exchange-traded funds hold underlying assets. Due to UCITS constraints, spot crypto ETFs are not available to UK retail investors, but crypto ETNs are.

Why this matters for BTC and ETH liquidity

Deeper order books and tighter spreads: Larger permitted stablecoin balances allow market makers to quote more aggressively across price levels, improving execution for BTC and ETH spot and derivatives.

On-shore consolidation: Exemptions reduce the need to split stablecoin inventory across multiple entities or relocate to other jurisdictions, keeping activity—and supervisory visibility—within the UK.

Competitive positioning vs EU: With fewer constraints on non-GBP stablecoins than under MiCA, the UK could attract global dollar-stablecoin flow, reinforcing London’s role in digital asset trading and settlement.

Retail distribution channels: FCA’s opening for crypto ETNs on the LSE broadens access without waiting for spot crypto ETFs, potentially increasing mainstream participation in BTC and ETH exposure.

Risk considerations and safeguards

Issuer quality and reserve transparency: The stability of a stablecoin depends on the quality and liquidity of its reserves and the issuer’s redemption policies. Regulators focus on disclosures, attestations, and redemption frameworks to reduce run risk.

Operational risk and segregation: Exchanges and custodians must manage segregation of client assets, cybersecurity, and operational controls to protect customers during stress events.

Systemic and currency-substitution risk: Regulators balance innovation with safeguards that prevent excessive reliance on foreign-currency stablecoins in domestic payment systems.

Additional resources and outside references

• Bank of England on systemic stablecoin risk and regulation: see BoE discussion papers and Financial Policy Committee reports.

• FCA policy statements and guidance on cryptoasset financial promotions and market integrity: check FCA website.

• EU MiCA regulatory text and summaries: European Commission and European Banking Authority resources.

• Stablecoin risk frameworks and market structure analysis: BIS and FSB publications.