Sterling-denominated stablecoins: Insights from the Bank of England’s consultation

Scope

It should be remembered that the Bank’s proposals sit alongside a wider framework for the regulation of cryptoassets, under which persons undertaking various activities relating to stablecoins, including the issuance of qualifying stablecoins, will be regulated by the FCA. Only those payment services and service providers recognised by HMT as systemic (collectively referred to as Systemic Stablecoin issuers) will come within the scope of the Bank’s regime but will still be regulated by the FCA for conduct, consumer protection and competition.

The test for whether the system or service is systemic is whether deficiencies in its design or operation, or disruption to it, would be likely to threaten UK financial stability or confidence, or to have serious consequences for business or other interests throughout the UK. In reaching its determination, HMT will consider a range of factors - for instance the volume, value and nature of transactions; the system’s interconnections and substitutability; and whether the Bank uses the system - and will take technical advice from the Bank and consult with the FCA. 

However, there are no hard quantitative thresholds, which will create uncertainty for stablecoin issuers and may have a detrimental effect on their development in the UK.

Once recognised by HMT, a Systemic Stablecoin issuer will be subject to the Bank’s powers including to obtain information, to issue principles and Codes of Practice, to require the establishment of system and service provider rules, and to make directions. The Bank also has powers of enforcement over issuers that fail to comply with the Bank’s regulatory requirements.

The Bank’s consultation considers two primary use cases for Systemic Stablecoins. The first is payments, which appears to be the Bank’s natural focus. It anticipates both retail and corporate payments, the latter including for business-to-business and treasury management purposes, and both domestic and cross‑border.

The second concerns wholesale settlement, which refers to the Bank’s final discharge of obligations between financial institutions (such as issuers, wallet providers, payment system operators, and banks). The Bank has a low risk appetite for any change that would result in payment obligations—currently settled in central bank money via the Real Time Gross Settlement system (RTGS)—migrating to a private stablecoin ledger.

In this instance, the Bank proposes to explore the use of Systemic Stablecoins within the Digital Securities Sandbox, subject to guardrails and activity limits and, if this is successful, it could recommend the use of such stablecoins in core wholesale settlement systems by financial market infrastructures. However, it does not anticipate HMT recognition of stablecoins for use in non-core wholesale financial markets or cryptoasset markets. The Bank’s tentativeness towards wholesale settlement is disappointing given the ongoing developments in tokenisation⁴ and atomic settlement⁵ but perhaps the reduced likelihood of being recognised will provide such systems with more flexibility to scale up.

Backing

The Bank proposes a conservative, highly liquid backing model designed to support stability at par value and swift liquidity in stress, and provide confidence in redemption. At least 40% of the Systemic Stablecoin’s backing assets would have to be held as unremunerated deposits⁶  at the Bank, with up to 60% invested in short‑term sterling UK government debt. However, issuers that are identified as systemically important from the outset of their operations (“systemic at launch”) would be subject to a step-up regime and be permitted to hold up to 95% of backing in UK government debt at inception, tapering to 60% as the Systemic Stablecoin reaches a scale at which stronger safeguards are appropriate without unduly impeding viability.

Interestingly, in its 2023 discussion paper⁷ the Bank opted for a backing model⁸  of “100% at the central bank” but the change in course is bringing the UK closer to its international peers.

To buttress the backing model, the Bank proposes additional requirements.

Issuers implement per-coin holding limits of £20,000 per individual and £10 million per business, with potential business exemptions. The Bank has calculated that without these limits additional central bank lending demand could reach about £250 billion, with a marked increase in the share of firms falling below the 100% liquidity coverage ratio. However, the limits are intended to be temporary and may be removed as the system adapts. 

To ensure that Systemic Stablecoin holders have robust claims, issuers are required to meet redemption requests of any size and at par. Redemption requests should be processed by the end of the day on which a valid redemption request is made, and in real time wherever possible. And Stablecoin issuers may charge fees proportionate to the costs incurred. It should be noted that issuers of Systemic Stablecoins will not be permitted to pay interest to their coinholders. This is consistent with the Bank’s focus on Systemic Stablecoins for payments rather than a means of investment.

To cover general business risks such as operational or cybersecurity incidents and infrastructure failure, risk-based capital requirements for general business risk are proposed as the higher of six months’ operating expenses or the cost of recovery from the largest plausible loss event. Issuers will hold separate reserves of liquid assets to cover financial risks to backing assets and insolvency or wind‑down costs. These would be held on trust for the benefit of Systemic Stablecoin holders to ensure they can recover the full value of their holdings in the event of issuer failure.

Of these proposals, holding limits have received the most critical attention, with many seeing them as a blunt tool that could hinder adoption and put the UK at a competitive disadvantage compared to non‑UK or non‑sterling coins. There are also concerns that these limits, whilst temporary, could be difficult to remove once implemented, and that there should, for example, be time‑limited sunset provisions or mandatory periodic reviews. The issue is that the speed and scale of stablecoin adoption remain unknown, so this is the Bank’s way to assess uptake, monitor developments, and determine whether to maintain, raise, or remove the limits.

Stablecoins v tokenised deposits

The Bank envisages that issuance will be undertaken by non‑bank issuers, which reflects the Prudential Regulation Authority’s previously articulated position⁹ that if a bank wished to issue stablecoins to retail customers, it would need to do so through a separate, non‑deposit‑taking, insolvency‑remote entity with distinct branding to avoid confusion to its customers. Banks will still be interested in the new regime because, even if they do not intend to set up an affiliated issuer, they may want to hold the backing assets or perform another role. 

Banks will also be able to provide tokenised deposits, being digital representations of their traditional deposits. They will have the advantage of being able to fund bank balance sheets, bear interest, and not require a dedicated backing pool. Holders retain the same legal relationship with the issuing bank, including protection under the Financial Services Compensation Scheme. The Bank recognises that stablecoins and tokenised deposits will both form part of the new multi-money system, alongside central bank money¹⁰  (for which there may be a digital version in due course) and it will be interesting to see how these different forms of money interoperate with each other and with other cryptoassets, including those originating outside the UK.

Cross-border

The Bank’s proposed policy is that Systemic Stablecoins will have to be issued in the UK and therefore non‑UK entities would need to do so through a UK subsidiary. That subsidiary would be required to hold the backing assets, and any assets funded by capital, in the UK. 

For non‑sterling‑denominated stablecoins issued overseas that could become systemic in the UK, the Bank is considering a deference‑based approach. Here it could rely on the home authority of the issuer where the regime is assessed as comparable in terms of its key components, such as regulatory requirements, risk mitigation measures, supervisory approach and arrangements for managing issuer failure. Such an approach would be aligned with the UK’s existing framework for overseas financial market infrastructures and provide an efficient method for enabling the use of significant stablecoins backed by other currencies. However, the Bank makes clear that deference would only be possible where it does not put UK financial stability at risk, and more information on this would be helpful since it appears to be a critical gating item. 

The ability to use stablecoins cross border is likely to be a fundamental part of their success so the UK’s suggested approach needs to be read alongside those of other key countries. There are many cross-border questions that the paper does not purport to address, and which need to be worked through by regulators collectively, including the possibility of stablecoins issued in multiple jurisdictions.

Practical take-aways

The consultation runs until 10 February 2026 and thereafter the Bank plans to consult on and finalise Codes of Practice, which will set out the specific rules and expectations for Systemic Stablecoins. During this time, the legislation delineating the circumstances in which stablecoin issuers will require authorisation may be finalised and there may be more detail on the corresponding FCA rules that would apply to such entities. Taken together, these measures amount to a substantial new regime. The immediate priority for firms should be to map the regime’s scope and requirements so that they may develop a clear understanding of its contours. With that foundation, potential issuers and service providers can identify concrete opportunities, assess any remaining obstacles to their intended use cases, and provide informed, targeted feedback to regulators.