- What’s happening: The Bank of England has issued a revised consultation on regulating systemic sterling-denominated stablecoins, replacing its unworkably strict 2023 proposals with a more commercially viable model that permits up to 60 per cent of reserves in short-term government debt.
- Why it matters: The shift reflects regulatory pragmatism in a politically sensitive area, balancing innovation with safeguards against rapid deposit outflows that could destabilise banks.
- What’s next: Consultation closes in February, with final rules expected later in 2026, alongside parallel FCA rules for non-systemic stablecoins and further guidance on interoperability and cross-border coordination.
Stablecoins were meant to simplify payments, but the rules for keeping them safe have proved anything but simple.
The Bank of England has taken a step back from the hard line it drew in 2023. Its new consultation on systemic sterling-denominated stablecoins, published in November, reflects a pragmatic shift shaped by months of industry feedback and a wider international context that has moved quickly.
The framework still aims to protect financial stability, but the tone has changed. The bank appears increasingly conscious that a regime too far out of step with the United States and European Union could push prospective issuers elsewhere.
Stablecoins are digital tokens intended to track the value of traditional currency. Their scale and speed of movement can pose risks to payment systems and bank funding, which is why regulators are paying closer attention.
The centrepiece of the revised approach is a rebalanced model for backing assets. Instead of the 2023 requirement that issuers hold all reserves as unremunerated deposits at the central bank, the bank now proposes a 60-40 split between short-term UK government debt and central bank deposits.
How the bank has recalibrated its reserve model
The shift is significant. Stablecoin issuers depend on income from reserve assets. A framework permitting gilts allows issuers to generate modest returns while maintaining high-quality, liquid backing. The 40 per cent deposit requirement preserves rapid redemption certainty and gives the bank the comfort of knowing a baseline proportion of reserves sits under its direct control.
This recalibration traces directly back to industry criticism of the 2023 paper, which drew 46 responses. Firms warned that a zero-yield reserve model was fundamentally incompatible with stablecoin business economics. Many argued the proposal risked rendering the UK uncompetitive, given the EU’s MiCA regime and emerging US legislation both allow high-quality liquid assets in reserve portfolios. The bank has now moved closer to this international consensus. Officials frame the shift not as a loosening of standards, but as an alignment with global best practice.
The bank has also outlined transitional arrangements for firms moving from the non-systemic regime into systemic oversight. These firms may initially hold up to 95 per cent of reserves in government debt before stepping down to the standard 60-40 split. This step-up model is designed to ease the transition and support early viability for firms newly designated as systemic by HM Treasury.
Another notable development is the introduction of temporary holding limits. Individuals would be capped at £20,000 per systemic stablecoin, and businesses at £10 million, with exemptions for retailers and platforms that rely on higher balances for standard operations. These limits are presented as a containment tool while regulators assess risks from rapid shifts of deposits out of banks and into stablecoins. The concern is not theoretical.
The bank’s own stability research points to scenarios in which a sudden move into stablecoins could constrain bank lending. The limits are therefore framed as temporary and will be relaxed as the market matures.
Financial stability remains a central theme
Financial stability remains a central theme. The bank is considering a liquidity backstop for eligible, solvent issuers unable to monetise backing assets in private markets. This would act as a backstop in moments of stress, mirroring the emergency liquidity arrangements available to banks. The proposal reflects lingering lessons from the 2023 banking turmoil and the temporary de-pegging of the USDC stablecoin, which illustrated how reserve composition can matter under pressure.
The consultation emphasises how limited the systemic perimeter will be. Only stablecoins designated by HM Treasury as systemic will fall under Bank of England supervision. The criteria hinge on transaction volumes, substitutability, and interconnectedness. Most tokens currently in circulation will not meet these thresholds and will remain under Financial Conduct Authority oversight. The FCA’s own framework for non-systemic stablecoins is expected to progress through 2026 and will complete the UK’s dual-regulator architecture.
The division of responsibilities is deliberate. The bank focuses on financial stability and prudential supervision where systemic risks could arise. The FCA continues to lead on conduct, consumer protection, and money-laundering controls. The two regulators will coordinate through shared standards and, in time, a jointly developed set of Codes of Practice.
The consultation points to further work on interoperability between forms of digital money and the role stablecoins may play in the Digital Securities Sandbox, where the bank and FCA are testing new settlement models for wholesale markets.
Strategic aims and broader context
The bank’s recalibration also reflects broader strategic aims. The UK’s National Payments Vision, published last year, sets out ambitions for a more competitive, innovation-ready payments ecosystem.
Stablecoins form one part of that landscape. They sit alongside the bank’s ongoing exploratory work on a digital pound. Regulators are keen to ensure new forms of digital money can emerge without undermining confidence in existing payment systems.
Reactions from industry have been broadly positive. Firms view the revised backing model as workable and internationally aligned.
The bank has now moved closer to international consensus, framing the shift not as a loosening of standards but as an alignment with global best practice.
Some commentators argue the 40 per cent deposit requirement remains demanding, given the opportunity cost of holding unremunerated balances. Others emphasise that the framework is still among the most stringent globally.
The bank’s choice not to allow interest payments to stablecoin holders reinforces the idea that these tokens are meant to function as payment instruments rather than investment products. Allowing interest, the bank argues, would blur the line with savings products and increase competition with traditional bank deposits.
Questions remain on business model viability, especially for smaller issuers facing capital, operational, and technology costs. The bank has not yet set out final capital requirements and acknowledges that more detailed drafting will follow.
The temporary holding limits raise concerns among some analysts who argue that they protect incumbents by limiting deposit competition. Others see them as a pragmatic interim step, given UK reliance on bank-based lending.
Why international rules matter
International alignment will shape how the regime lands. If the UK maintains holding limits while US and EU frameworks move ahead without them, there is a risk large global issuers will prioritise other markets. The bank signals awareness of this challenge and notes that its implementation timeline is broadly in line with the United States. This suggests a degree of coordination on overall sequencing, even if specific requirements differ.
The coming year will test how far the UK’s approach can balance market development with prudence. Decisions on systemic designation, the conditions of the liquidity backstop, and the eventual removal of holding limits will determine the attractiveness of the market for prospective issuers. Developments in the Digital Securities Sandbox will also matter, particularly if regulators choose to recognise a category of systemic stablecoins used primarily for wholesale settlement.
What other regulators should watch
Regulators in Australia, New Zealand, and other jurisdictions still shaping their own frameworks could view the Bank of England’s shift as a reference point. It shows that initial proposals may require recalibration once markets begin to engage, and that alignment with global peers can be as important as domestic financial stability considerations.
The UK is now closer to the international middle ground: allowing commercially viable business models while maintaining a robust prudential perimeter. Whether this balance endures once the regime is operational will depend on how the market evolves and how regulators respond to the first wave of applications.
The consultation closes in February. Final rules and Codes of Practice are expected later in 2026. The framework’s real impact will only become visible once firms declare their intentions, HM Treasury makes its first systemic designations, and the regime moves from design to execution. For now, the UK has edged toward a more pragmatic approach to digital money, while signalling that stability concerns still carry the greatest weight.
