Bank of England proposals to cap stablecoin holdings draws fire

There is no risk of stablecoins "draining deposits" from commercial banks - the only way to do this is through physical cash withdrawals or by loan repayments.

To illustrate, a consumer purchasing say, £1K in stablecoins from an issuer transfers £1k deposits from their bank to the issuer's bank account where it stays until the stablecoins are redeemed or is used to purchase £1k of government bonds where it then is deposited in the bond seller's bank account (government, pension fund etc). Deposits always remain in circulation in the banking system until used to repay loans or exchanged for cash.

I believe the real reason why central banks, the BoE in particular are wary of stablecoins is because central banks have no role in settling payments made with stablecoins. This eliminates the settlement risk and counterparty risk (between settling banks) that arise from the central bank settlement process, so in reality stablecoin payments are less risky than traditional payments between bank accounts at different banks. It also means that commercial banks have less need for reserves at the central bank, thus reducing the central bank's ability to influence lending rates, another reason why central banks are concerned.

I am happy to be proved wrong in this analysis but it helps explain the BoE's stance. However, it is somewhat academic as it is difficult to foresee a GBP stablecoin from becoming systemic for some time.

Have you considered that the stablecoin issuer transfers the "fiat money" it recxeives from a buyer of stablecoins, to an overseas institution? If so the money is out of circulation in the UK. Consider a typical marklet risk: If and when the stablecoin holder wants to redeem and get a reepayment to his/her UK bank account, the issuer cannot pay since it has no "fiat money" in its accounts. The holder sits with an unwanted asset that nobody else wants to buy for any reasonable value... 

Stablecoin issuers should have simliar safgeguards as deposit taking institutions have, equity demands, risk policy, governance rules, qualification criteria on management and board, extensive reporting to an authority in charge of supervision... + a safeguard payment to BoE to cover any belly-up compensation to holders of stable coins up to a threshold limit of for instance 10 000 GBP per holder. Right now the stable coin market looks like an accident waiting to happen and the BoE proposed regulation is by far not enough. The US market rules cannot be taken seriously since their president himself is an issuer of stablecoins and is not restricting himself... 

This is very dissappoponting.  The Bank is meant to be supporting competition and innovation not stiffling it.  Yes there should be regulation to protect vulnerable customers but limits like this are blunt instruements that will hamper the UK becoming a leader in this field.   Cheers Chris