In August, HM Treasury of the UK announced plans to give the Bank of England a new secondary objective: to support innovation in payment systems and emerging forms of digital payments, including stablecoins.
The government’s decision represents an important institutional shift, one that is informed by the UK’s desire to become a more attractive destination for financial innovation. Notably, the Bank of England has historically approached new financial developments through the lens of stability, resilience and risk management. Its approach to cryptoassets has also reflected this philosophy: innovation may offer benefits, but it should not be allowed to create risks that the financial system would otherwise not tolerate.
For the crypto industry, this raises an important question. Can an innovation mandate given to a single regulator meaningfully address the barriers facing an industry that operates across multiple regulatory and commercial systems?
The Bank can change its rules, but not the entire market
One of the most persistent challenges facing crypto businesses is access to banking services. In August, the All-Party Parliamentary Group (APPG) on Crypto and Digital Assets wrote to the chief executives of HSBC, Nationwide, NatWest, Santander UK and Starling Bank over restrictions on crypto-related payments. The concern is part of a broader argument about whether banks are effectively limiting access to the financial system for legitimate crypto businesses and customers. The issue has become associated with the language of the Biden Administration’s “Operation Chokepoint 2.0” — the idea that crypto firms can be constrained not through an explicit prohibition, but through their access to banking and payment services.
For a business, this creates an obvious problem. Regulatory permission does not automatically translate into operational viability. The Bank of England’s innovation mandate cannot, by itself, solve this problem. This is partly because responsibility for the wider banking system is divided between different institutions, such as the Prudential Regulation Authority (PRA), the Financial Conduct Authority (FCA), and commercial banks themselves.
The Prudential Regulation Authority (PRA), which oversees the safety and soundness of banks and other major financial institutions, has exercised its own statutory functions and regulatory responsibilities since 2017. While the BoE’s Financial Policy Committee (FPC) – which looks at systemic, economy-wide risks – has the statutory power to issue binding “directions” to the PRA to implement specific regulatory frameworks, the PRA independently decides how to apply and enforce those measures on individual commercial banks.
This creates an important institutional reality: no single regulator controls the entire journey of a crypto business. The Bank may encourage innovation in areas within its own remit; the FCA may authorise a crypto firm; the government may promote the UK as a centre for digital asset innovation. Yet, a commercial bank may still decide that the risks associated with serving that business outweigh the potential commercial benefit.
The result is a regulatory system in which no institution has necessarily prohibited innovation, but innovation can still be difficult in practice. That is the central challenge facing the UK’s approach.
A new mandate does not replace an old philosophy
Importantly, the Bank’s new innovation objective sits alongside, rather than above, its existing responsibilities. Financial stability remains its primary concern. The new mandate will require the Bank to report annually to Parliament on how it has advanced the innovation objective. Though this does provide Parliament, industry and other stakeholders an opportunity to ask what the Bank has done to enable innovation within the digital payments system, it is best understood as a governance change rather than an entirely new regulatory power.
Nor is the concept entirely new. The Bank already has a secondary innovation objective, which it exercises when regulating central counterparties and central securities depositories. The proposed reform only extends that approach into payment systems, including those using digital settlement assets such as stablecoins.
Notably, where innovation and stability point in the same direction, the new mandate may encourage the Bank to take a more accommodating approach. But where innovation and financial stability genuinely conflict, the Bank’s statutory framework requires financial stability to take precedence. That hierarchy matters. It does not compel the Bank to prioritise innovation over financial stability when the two come into conflict. It also does entitle crypto firms to lighter regulation.
This creates an inherent tension. The Bank is being asked to encourage innovation while continuing to ensure that innovation does not threaten the financial system. The new mandate may therefore encourage the Bank to rethink the stringency of regulatory requirements, and whether some of these requirements are genuinely necessary, it cannot simply remove the Bank’s responsibility to act cautiously. The real question is therefore not whether the Bank will become less conservative. It is whether it can find ways to apply caution differently. Notably, the Bank’s emerging approach to stablecoin regulation provides an indication of what this may look like.
The stablecoin framework reveals the Bank’s preferred approach
On stablecoins, the Bank has, on the one hand, shown greater flexibility than some of its earlier proposals suggested. Certain restrictions that could have significantly limited the commercial use of stablecoins have been reconsidered or softened. For instance, the Bank moved away from its earlier proposal limiting individual and business holdings of systemic stablecoins. Instead, it introduced a temporary issuance guardrail of £40 billion for each systemic stablecoin. Households and businesses will not face restrictions on how much they can use a stablecoin; the constraint now sits on the amount that can be issued. The Bank has also said that the guardrail will be reviewed and ultimately loosened or removed once the risks to credit provision have been addressed.
It also made the backing-asset rules more accommodating. Issuers can hold up to 70% of their backing assets in short-term UK government debt, with at least 30% held as deposits at the Bank of England. The move represented a significant change from the earlier proposal, under which 40% would have been held in central bank deposits and 60% in short-term government debt. The Bank described the revised approach as supporting innovation and market entry while protecting the supply of credit to the wider economy.
On the other hand, this flexibility remains firmly within a stability-focused framework. Requirements around reserve assets, governance and systemic risk continue to form the foundation of the regime. For instance, the remaining 30% of the backing assets must sit as deposits at the Bank of England, so that a significant portion of the reserves can be accessed quickly if users want to redeem their stablecoins for pounds. The other part of the reserves can be invested in UK government debt, but only in short-term instruments. This matters because the value and ease of selling a government bond can change depending on its maturity. Short-term government debt is generally easier to convert into cash quickly and is less exposed to large price movements caused by changes in interest rates.
This represents the Bank’s preferred model of innovation: allow new activities to develop, but only within a structure that limits the potential consequences of failure. The Bank is therefore not abandoning caution. It is attempting to make caution more proportionate by distinguishing more carefully between risks that genuinely threaten consumers or financial stability and requirements that simply reflect an outdated understanding of how a new technology operates.
But this also reveals the limits of the Bank’s new mandate: even if the Bank becomes more responsive to innovation, it only controls part of the environment in which crypto firms operate. This is where the UK’s regulatory architecture becomes particularly important.
The real test is regulatory coordination
The Bank of England’s new objective is therefore significant not only because of what it asks the Bank to do, but because of what it exposes about the limits of individual regulatory reform. Crypto firms operate across central banking, financial markets, consumer protection, banking, payments and financial crime frameworks. A change in one part of the system may have limited impact if the other parts remain unchanged. Giving one regulator an innovation mandate may not automatically align all of those perspectives.
This does not mean that the Bank’s new mandate is unimportant. On the contrary, the stablecoin framework already suggests that greater attention to innovation can influence regulatory design. The Bank appears willing to reconsider restrictions where they may unnecessarily limit commercial development, while continuing to retain safeguards where risks to the financial system remain significant.
The Bank of England’s innovation mandate is ultimately testing a broader assumption about financial regulation: that innovation can be encouraged simply by adding innovation objectives to individual regulators. The experience of crypto suggests that the problem may be more complex. A regulatory system can support innovation only if its different parts work together. A central bank may become more responsive to new technology, but that will have limited impact if other parts of the financial system continue to create barriers that it cannot control.
The next phase of crypto regulation may therefore not be about asking regulators to become less cautious. Nor is it simply about giving more institutions an innovation mandate. It may instead be about a more difficult task: ensuring that regulators with different responsibilities can work together to create a system in which innovation is not only legally permitted, but practically possible.