The transaction limits on Stablecoin  being imposed by Bank of England

Why in news

• Recently, the Bank of England is planning to  place a stablecoin transaction limits of £10,000 to £20,000 for individuals and £10mn for businesses on all systemic stablecoins.

What is Stablecoin 

• Stablecoins are a type of cryptocurrency which would help to maintain a stable value pertaining to a certain asset.  Stablecoins are typically pegged to a traditional currency such as the US dollar. It differs with Bitcoin and those other kind of cryptocurrencies whose price fluctuates.

Purpose

• Stablecoins are not usually used for transactional purposes. 
• The crypto investors use it to position their hard earned profits without changing them back into real money. 
• It surpasses the traditional payment system and provides speedy and cost effective transaction. 
• The ownership is registered in digital ledgers, at the same time removes costs and lengthy processing times in cross-border transitions.
  

Types of Stablecoin pegged to the assets

• Fiat currency – Government issued currency authorised as legal tender
• Commodities -  like  gold, silver or oil 
• Cryptocurrencies – Tether,  ethereum, ripple etc.
• Algorithmic stablecoins - Regulated through a computerised algorithm. It resembles to a currency peg in which more coins are generated if the trades of stablecoin more than its pegged value causes a price reduction. 
• In the same manner several coins could be taken out of circulation if its trade goes below the peg, for generating demand and make the price to increase.

Associated risks

• It can pose threat to Financial stability like bank run after extreme withdrawal of holdings.
• Bank for International Settlements (BIS), concerns the issues of its Singleness in secondary markets, Elasticity of demand in the market , Integrity involves KYC (know your customer) without which malpractices such as money laundering, terror funding and other suspicious activity may occur.

Regulating bodies 

• Guiding and Establishing National Innovation for US Stablecoins Act, or the GENIUS Act, 2021
• European Union’s Markets in Crypto-Assets Regulation (MiCA) in December,2024
• The Stablecoin ordinance was passed in May 2025 in Hong Kong.

India’s Stand

• India does not recognize stablecoins. All cryptocurrencies considered as Virtual Digital Assets (VDA) under Section2 (47A) of the Income Tax Act,1961. 
• VDAs comes under Prevention of money laundering act,2002 to counter its misuse. 
• Alternatively, India has Central bank digital currency (CBDC) also known as its digital rupee. 
• The programmable payments could be done with CBDC like DBT (direct benefit transfer)

What is Cryptocurrency?

• It is a digital or virtual currency which is not regulated by any government or institution and utilize cryptography for security purposes.
• Its transaction is recorded on a public digital ledger known as Blockchain. 
• It is also a medium of exchange, created and stored electronically on the blockchain.
• It secure and verify the transfer of funds of peer to peer transactions of algorithm. 
• Bitcoin in 2009 was created as first decentralised cryptocurrency founded by  pseudonymous figure Satoshi Nakamoto.

Working of Cryptocurrency

• It operates on blockchain technology, and devoid of any bank intervention. The key points are:

Decentralisation: 

• Cryptocurrencies is a network of nodes which update and manage the digital ledger. 
• It has no central authority to dictate. So there is a lack of centralized control over currency issuance and transactions.

Blockchain Technology: 

• Every transaction is recorded in encrypted ‘blocks’. Blocks are chained together systematically and distributed across the network.
• This creates an immutable, transparent ledger of all transactions validated by consensus algorithms.

Encryption: 

• The public-private key pairs, digital signatures and used to secure transactions and log in to the network anonymously.

Consensus Mechanisms:

• Proof of work (PoW): There are miners who solve a very complex puzzles which is a energy intensive. Eg. Bitcoin
• Proof of Stake (PoS): The type and amount of coin holdings is the basis of chosen by Validators. It is energy efficient. For example Ethereum 2.0

Wallets & Keys 

• Private key – It includes a password without which access would be denied for transactions.
• Public Key – It includes an account number
• Hot wallets – It is more easy and convenient to use. Also known as Online wallets
• Cold Wallets – It is considered as safe and known as Offline wallets.

Mining & Validation 

• Miners goes deeper to process , create new coins and validates the transactions. 
• It is not having any central authority.

Trading and Transactions

• Trading is easy and smooth. The Users can easily sell and buy cryptocurrency. 
• The cryptocurrency could be changed in fiat currency and according make payment for that. The small contracts (self-executing code on blockchain) which make functionality beyond currency.

Cryptocurrency Types

• Payment Cryptocurrencies:  Peer-to-peer transactions without intermediaries. 
• It is meant for Tansactions of bitcoin, Litecoin etc and have limited supply.

Stablecoins: 

• The cryptocurrency is pegged with the traditional assets like US Dollar and Tether.
• It significantly reduce volatility of currency and maintain price stability.

Utility Tokens: 

• These gives direct access to a specific product or service.
• Filecoin- is utilized for cloud storage, and Chainlink is utilized for smart contracts.

Security Tokens:

• It is similar to the stocks and bonds in a digital format having ownership or investment in assets .

 Governance Tokens: 

• Holders can participate in the governance and decision making of the blockchain protocol. E.g.  MakerDAO.

Cryptocurrency Significance

Lower transaction costs & speed:

• Cross‐border transactions could be made much faster & cost effective as reduction in intermediaries there. 

Financial inclusion: 

• The people can get benefits without use of  traditional banks. 
• For this process Digital wallets and mobile tech can easily help. 

Transparency & security: 

• The users can gain trust because of  Blockchain’s immutable ledger
• It  improves traceability and trust. 
• Cryptographic methods can protect the integrity. 

Innovation: 

• The wide range of  Smart contracts, decentralized finance (DeFi), new business models could make familiar to this technology.
• They Decentralized applications like AAVE, MakerDAO Compund etc, have the potential to overcome accessibility challenges through mobile-based blockchain systems.
  

Cryptocurrency Limitations:

High volatility-

• As there is no involvement of central agency to regulate the cryptocurrency fluctuations are high. 

Potential threats to energy security.

• Financial instability: Transactions could highly impact monetary policy effectiveness, and possibly   haunt global financial stability.
• For Instance, IMF warned El Salvador, which adopted Bitcoin as legal tender, that the unregulated assets could be hazardous.

Cyber threats: 

• The hackers and malicious activity makes Cryptocurrency platforms vulnerable for system trading manipulation.
• For example hackers have keen interest in private keys stored by wallet service providers 

Criminal activities: 

• The anonymity in transactions can be misused for terror funding and money laundering 

Energy security and Climate change: 

• Cryptocurrencies processing need great amount of electricity for purpose of mining as a consequence greenhouse gas emissions occurs. 
• For Instance,  In 2018 the total electricity used of Bitcoin mining was equivalent to that of mid-sized economies country like Indonesia.

Potential Applications of Cryptocurrency

Financial services: 

• Blockchain technology enhances the pace of settlement, 
• Make operations easier like tracking bank guarantees, 
• Make possible real-time transaction along with reducing costs for businesses.
• For instance, JP Morgan utilized its cryptocurrency JPM Coin for speedy transactions among institutional clients that too in seconds.

Healthcare: 

• The Blockchain technology  make payment processing better.
• It can magnify efficiency and security of the electronic medical records, data security in healthcare facilities.
• For instance Andhra Pradesh government uses this blockchain technology to prevent data of land records, people from hackers and malicious activity

Retail: 

• The best example could be seen in Retail sector where Non-Fungible Tokens (NFTs) on blockchains used to make customers busy with exclusive digital assets.
• This technology was used by the multinational companies like Adidas and Nike, who have launched NFTs and Metaverse company stores it.

Marketing and Advertising: 

• Blockchain can boost the security and transparency when it comes to sharing customer data and eliminate deceptive practice in digital ad buying.
• For example Adwatch utilizes blockchain technology in its digital advertising solutions.

Real estate: 

• Blockchain technology can impact greatly in property transactions and enhance transparency and security in real estate field.
• In 2021, a startup of Delhi facilitated India's first real estate tokenisation project using blockchain.

Lending: 

• Blockchain provides speedy and cost effective lending processes by removing intermediaries.
• Indian P2P lending platforms such as LoanTap use blockchain for loan disbursal and repayment.

Voting: 

• Blockchain ensures end-to-end encryption and tamper-proof records, making voting more secure, transparent, and accessible, especially for remote voters.
• For Example: IIT Madras, with the Election Commission of India , has been working on a blockchain-based remote voting solution for domestic migrants.

Gambling: 

• Blockchain brings transparency and trust to gambling by algorithms and anonymous crypto-transactions. As in gambling and gaming the risk of fraud and manipulation occurs.
• Example: FunFair Technologies, uses Ethereum-based smart contracts to ensure the fair casino games .