Metals, papers, and now digital – the evolution of money has been drastic. From a tangible asset backed in gold to an intangible digital asset backed in a country’s currency, its form has changed completely, especially with the introduction of stablecoins in 2024. However, as these digital currencies grow in use, questions about safety and trust surface. The Bank of England’s latest consultation paper on regulating sterling-backed stablecoins reflects this tension and aims to protect financial stability in the UK’s payment systems while still allowing room for innovation. 

Defining systemic stablecoins and regulatory scope

Systemic stablecoins, as defined by the BoE, are digital currencies denominated in sterling that are widely used for payments and whose failure could pose significant risks to the stability of the UK’s financial system. Stablecoins function as a form of money in everyday transactions, including retail payments by individuals and corporate payments by businesses, making their reliability and resilience crucial to maintaining public trust and financial stability.

The BoE’s regulatory focus targets stablecoins denominated in sterling that meet specific criteria of systemic importance. These criteria include transaction volume, the nature and scale of services provided, and the degree of interconnectedness with other critical financial infrastructures. 

The designation of which stablecoins are systemic is determined by HM Treasury (HMT), based on advice from the BoE. Once recognised as systemic, these stablecoins are subject to a joint regulatory regime overseen by both the BoE and the Financial Conduct Authority (FCA). This oversight reflects the dual nature of systemic stablecoins as both payment systems and financial products.

The consultation paper also clarifies that non-systemic stablecoins, used primarily for cryptoasset trading, will remain under the FCA jurisdiction. However, systemic stablecoins will be jointly regulated by the BoE and FCA, with a joint regulatory approach expected to be published in 2026.

Here are the BoE’s key proposals. 

1. Improvised backing asset requirements

The BoE has revised its initial proposal, now requiring that at least 40% of backing assets for systemic stablecoins be held as unremunerated central bank deposits, with up to 60% permitted in short-term sterling-denominated UK government debt securities. This adjustment aligns the UK’s approach with international regulatory trends and provides issuers with greater flexibility while maintaining robust liquidity safeguards.

The bank emphasises segregation and statutory trust arrangements to back assets, ensuring they are held for the benefit of coinholders under fiduciary duties. This means that the backing assets must be legally separated from the issuer’s own assets, held in a dedicated trust or account that protects coinholders’ interests. Such arrangements prevent the commingling of assets and safeguard them from risks arising from the issuer’s insolvency or financial difficulties.

Non-central bank deposits must be safeguarded by a regulated third-party custodian, enhancing protection against insolvency risks and ensuring that backing assets remain secure and accessible to stablecoin holders even in adverse circumstances.

2. Capital and reserve requirements as per global standards 

Stablecoin issuers will need to follow international standards for capital requirements, specifically the Principles for Financial Market Infrastructures, a global framework that ensures the clearing, settlement, and recording of monetary and financial transactions and the resilience of financial market infrastructures.

They must also ensure they have enough capital to cover potential losses or operating costs for six months. 

3. The introduction of holding limits and redemption

The BoE proposes transitional holding limits of £20,000 per individual and £10 million per business across systemic stablecoins. In 2023’s consultant paper, this limit was £10,000–£20,000. 

The new limits aim to mitigate risks related to rapid outflows that could destabilise banking liquidity. Certain large retail businesses may be exempted based on operational needs, with the expectation that limits will be relaxed as risks are better understood and managed.

4. Requiring foreign issuers to establish UK subsidiaries

Companies issuing sterling-denominated systemic stablecoins from outside the UK must set up a UK subsidiary to operate domestically. This will ensure regulatory oversight and reduce risks to UK financial stability. 

The BoE and FCA will jointly supervise these issuers, acknowledging their dual role as payment systems and financial products. 

BoE is also exploring payment interoperability, innovation in wholesale markets, and cross-border arrangements to adapt to future developments in digital finance.

What would be the next steps and industry implications?

The BoE acknowledges the potential of stablecoins to enable faster, cheaper, and more efficient payments, offering valuable alternatives to traditional money. The consultation paper is a more nuanced, innovation-friendly stance than the earlier 2023 proposal.

The consultation period ends on February 10, 2026, after which the BoE will finalise the regulatory framework, expected to take effect in 2026.

As stablecoins grow in prominence, this regulatory clarity will be critical for issuers, investors, and users so that the benefits of digital money can be realised without compromising the integrity of the financial system.