BoE Exempts Crypto Firms from Stablecoin Caps

The Bank of England’s exemption for crypto exchanges and operationally critical firms from proposed stablecoin holding limits marks a dramatic reversal from draft rules reported in September that would have capped individual stablecoin holdings at £10,000 to £20,000 and limited firms to £10 million. According to Bloomberg News reporting from October 7, the central bank plans to grant waivers to firms requiring large token inventories for market-making and settlement operations, responding directly to industry backlash that these thresholds were unworkable given operational requirements routinely demanding billions of dollars in stablecoin balances.

Industry participants had argued that the proposed caps would have severely hampered their ability to maintain inventory for client trades, facilitate fiat conversion, and execute inter-exchange arbitrage. Without these exemptions, UK trading venues would have been forced to fragment client assets across multiple entities or relocate custody and trading operations to jurisdictions like Switzerland, Singapore, or the Cayman Islands, potentially draining significant liquidity from domestic order books. The BoE’s new approach aims to keep stablecoin flows visible and regulated within UK jurisdiction rather than pushing them offshore.

The exemptions enable UK-based exchanges and market makers to maintain centralized inventories for critical operational purposes that far exceed the proposed £10 million firm cap. Exchanges require substantial stablecoin float to facilitate instant execution and settlement, particularly when clients deposit fiat to buy crypto or sell crypto to withdraw fiat, using stablecoin inventory as the bridge between these transactions. Market makers similarly need significant balances to provide two-sided quotes on trading pairs and maintain market liquidity.

The scale of these operations makes the original caps impractical—mid-sized exchanges routinely process hundreds of millions of dollars in daily volume, requiring operational float that exceeds the proposed £10 million cap by orders of magnitude. Under the draft rules, platforms would have needed to distribute holdings across separate legal entities or route operations through non-UK affiliates, creating operational complexity and regulatory fragmentation. The exemptions eliminate this pressure, allowing exchanges to maintain unified stablecoin inventories under UK regulatory oversight.

The BoE’s exemptions align with the Financial Conduct Authority’s parallel development of rules for stablecoin issuers and custodians, creating a coordinated regulatory framework where issuers and custodians face requirements focused on backing and redemption, while exchanges and market makers operate under different rules tied to trading and settlement functions. This differentiated approach acknowledges the distinct roles within the crypto ecosystem.

Notably, the UK government has stated that overseas stablecoin issuers do not require UK authorization to have their tokens traded on UK platforms, creating a significant divergence from the European Union’s Markets in Crypto-Assets (MiCA) framework. Unlike MiCA, which requires authorization for issuers and imposes transaction volume thresholds on non-euro stablecoins to prevent currency substitution, UK platforms face no equivalent constraints. This regulatory difference creates a competitive advantage for UK venues, potentially incentivizing dollar-denominated stablecoin activity to concentrate in UK markets rather than EU exchanges.

The exemptions directly impact Bitcoin and Ethereum trading liquidity, as exchanges use stablecoin inventory to settle both spot and derivatives trades in BTC and ETH. Larger stablecoin balances enable market makers to provide tighter bid-ask spreads and deeper order books by committing more capital across various price levels, ultimately creating more efficient and liquid markets for these major cryptocurrencies.

This regulatory shift coincides with other positive developments for crypto in the UK, particularly the FCA’s October 8 decision to lift the retail ban on crypto exchange-traded notes (ETNs). As noted by Bitwise Europe managing director Bradley Duke, this change allows crypto ETNs listed on the London Stock Exchange to be sold to individual investors once platforms implement compliance infrastructure, expected by October 16. Retail access to crypto ETNs through online brokers and tax-advantaged accounts opens new distribution channels that complement the stablecoin exemption benefits.

Crypto ETNs, which are debt securities that track crypto prices without holding the underlying assets, have been available to professional investors since 2024 but now become accessible to retail investors. These instruments differ from exchange-traded funds (ETFs) by being structured as unsecured debt rather than pooled investments, allowing them to circumvent UCITS regulations that prevent funds from holding unregulated crypto directly. Together, the stablecoin exemptions and ETN accessibility reduce regulatory friction for on-shore crypto activity, creating multiple pathways to boost Bitcoin and Ethereum trading in UK markets.