Getting the Details Right: Paradigm’s Response to the FCA and Bank of England

The global race for dominance in stablecoins and cryptoassets is accelerating. With the GENIUS Act now operational in the U.S. and MiCA live in Europe, the U.K. can't afford to get its framework wrong. The Bank of England's consultation on systemic stablecoins and the Financial Conduct Authority’s consultation on cryptoasset activities together represent the most significant step yet toward a comprehensive U.K. regime. However, several regulatory choices risk leaving the U.K. on the sidelines.

Paradigm submitted our response to both the Bank’s and FCA’s consultation. We support the U.K.'s ambition to become a global center for digital assets. The Chancellor is right that crypto can play a role in economic growth – the question is whether the regulatory details will match the rhetoric. We urge both regulators to clarify key design elements to ensure the framework remains workable, commercially viable, and globally interoperable.

Here's where they should sharpen their approach:

1. Don't force global firms to fragment their operations.

The FCA acknowledges that major platforms operate global liquidity pools. Good. But rigid location requirements that effectively force firms to onshore entire trading books will fragment liquidity, raise costs for U.K. users, and hand an advantage to jurisdictions with more integrated cross-border access. The FCA should clarify that U.K. branches can access global order books without requiring a separate U.K. trading stack.

On stablecoins, the Bank of England faces a similar coordination problem: how will its regime align with MiCA and the GENIUS Act? How will it avoid double-regulating foreign-issued stablecoins used by U.K. institutions? These questions need answers before finalization.

2. The FCA should define decentralization—and make room for DeFi.

We welcome the FCA's decision to avoid a separate DeFi perimeter and instead apply outcomes-based standards wherever there's a responsible controlling entity. But to drive clarity, the FCA should articulate what "decentralization" actually means using objective, technical criteria: no privileged admin keys, transparent on-chain governance, auditable upgrade mechanisms, and sufficiently distributed validators.

The biggest opportunity for the U.K. may lie in wholesale and institutional DeFi—smart-contract protocols for liquidity provision, collateral management, and post-trade processes. The FCA should ensure these use cases aren't inadvertently constrained by a framework designed for retail.

3. 60% falls short – The Bank should allow 80-90% backing in short-term gilts.

The revised proposal allowing up to 60% of backing assets in short-term U.K. government debt is an improvement from 2023. That’s an improvement over past proposals that suggested 100% central bank deposits, but it's not enough. After all, raising a grade from an F to a C is no one’s idea of good scholastic effort. Major stablecoin issuers today hold 80-90% of reserves in government securities. A cap that forces issuers to sacrifice yield without meaningfully reducing risk will push them elsewhere.

The logic is simple: short-dated gilts and central bank cash have near-identical credit profiles and liquidity characteristics. They should be treated as equivalent high-quality liquid assets, because they truly are seen as such by markets. A model that prioritizes cash over government securities sacrifices issuer viability without a commensurate reduction in systemic risk; it’s the financial equivalent of the security theater we do at airports of making people take their shoes off. We encourage the Bank to consider evidence from international equivalents on whether a higher proportion, up to 80-90%, would provide sufficient liquidity resilience without compromising par redemption.

We also encourage the Bank to consider replacing a fixed 60:40 ratio with a flexible, risk-adjusted range determined on a case-by-case basis. This would allow the Bank to mitigate risks associated with issuer liquidity management and redemption delays while demonstrating openness to competitive commercial models. We do not generally apply one-size-fits-all models to other parts of fiscal regulation, especially when it comes to payment instruments; we should not similarly flatten regulations on stablecoins.

4. Holding limits are a solution in search of a problem.

The proposed per-coin holding limits, £20,000 for individuals, £10 million for businesses, risk constraining innovation before it even starts. This is a product for payments. How would Tesco, a supermarket that was the third-largest in the world in 2011 and had $69 billion in revenue in 2025, stay within these limits?

Comparable constructs already exist without these caps. Money market funds, narrow banks, and payment firms all hold short-term, liquid assets that match their liabilities at par value. None face fixed ex-ante holding caps. The risks to monetary stability are best mitigated through robust liquidity and capital regulation, not arbitrary balance restrictions.

The Bank's concern of potential deposit flight from the banking system echoes earlier debates around money market funds, where experience shows that liquidity management tools and supervisory monitoring proved more effective than arbitrary limits. At its worst, limits risk signaling instability to users, contradicting the Bank's objective of building trust between new and traditional forms of money.

We urge the Bank to treat holding limits as a discretionary contingency deployable under defined stress conditions, not a permanent design feature.

5. The FCA should clearly define what it means to truly be decentralized.

We welcome the FCA's decision to avoid a separate DeFi perimeter and instead apply outcomes-based standards wherever there's a responsible controlling entity. But to drive clarity, the FCA should articulate what "decentralization" actually means using objective, technical criteria: no privileged admin keys, transparent on-chain governance, auditable upgrade mechanisms, and sufficiently distributed validators.

The biggest opportunity for the U.K. may lie in wholesale and institutional DeFi—smart-contract protocols for liquidity provision, collateral management, and post-trade processes. The FCA should ensure these use cases aren't inadvertently constrained by a framework designed for retail.

What Comes Next

The U.K.-U.S. Transatlantic Taskforce provides an ideal forum to align standards before both regimes are finalized. We recommend the FCA and Bank of England draw on industry expertise, explore a transatlantic sandbox for crypto activities, and seek a path toward mutual equivalence with the U.S.

Get these details right, and the U.K. becomes a serious destination for crypto firms. Get them wrong, and London watches this market develop from the outside.

Read our full response to the Bank of England here and to the FCA here.