‘Significant step’ towards future of digital money: Bank of England publishes proposals for regulating sterling-denominated systemic stablecoins

Comment: Some welcome new flexibility in proposed policy approach with more opportunity for industry input

The Bank remains concerned that a disorderly transition to widespread adoption of systemic stablecoins could lead to a sharp reduction in the overall credit / cost of credit provided to the UK economy. However, it does not wish to stifle innovation in payments and money. Stablecoin issuers are likely to be pleased to see that the Bank has addressed two areas of particular industry concern in its revised proposals, namely:

• the position on backing assets, with systemic stablecoin issuers now being permitted to hold up to 60% of backing assets in short-term UK government debt (instead of being required to hold 100% of backing assets in unremunerated central bank money); and
• holding limits, where the Bank has proposed temporary limits of £20,000 per coin for individuals and £10 million for businesses but with exemptions from the £10 million business limit if the business requires balances above it in the course of doing normal business. It also expects to loosen and ultimately remove the holding limits in due course, as it gains ‘sufficient comfort that financial stability risks have been suitably understood and mitigated’.

However, the Bank acknowledges that areas of uncertainty among its revised policy proposals remain, eg issues caused by imposition of the systemic stablecoin holding limits where a coin transitions from the FCA’s non-systemic regime to the Bank’s systemic regime. It encourages further industry engagement as it works towards finalised Codes of Practice. It is also keen for comments on the emerging policy areas of interoperability (tying in with the newly published Payments Vision Delivery Committee strategy for the future UK retail payments infrastructure), innovation in wholesale markets, and cross-border arrangements.

Stakeholders should therefore be ready to review and respond to the revised proposals - and share their thoughts on the Bank’s outline of emerging policy areas - before the 10 February 2026 deadline.

Scope

• The proposed regime would not cover stablecoins used as assets for non-systemic purposes, such as the buying and selling of cryptoassets (currently the predominant use of stablecoins). Those would fall under the FCA’s regulatory remit.
• If initially non-systemic stablecoin issuers are subsequently recognised as systemic by HMT, they will transition into the Bank’s regime and will be jointly regulated. The Bank will oversee prudential and financial stability risks, and the FCA will continue to supervise conduct and consumer protection. In 2026, the Bank and the FCA will publish a joint approach document to clarify how rules will apply in practice and support a smooth transition between regimes.
• In the 2023 discussion paper, the Bank proposed that in light of the activity performed and the risks posed, it would be able to regulate critical entities in a systemic stablecoin payment chain, including service providers, if recognised by HM Treasury (HMT). Following feedback, the Bank has included further clarity on systemic importance, including how it intends to apply the criteria and factors, and assess against them in its advice to HMT.

Backing assets

• Following feedback objecting to the Bank’s earlier suggestion that 100% of backing assets had to be held as central bank deposits, systemic stablecoin issuers will be permitted to hold up to 60% of backing assets in short-term UK government debt. This position is likely to be welcomed by stablecoin issuers as they will be able to earn interest on government debt, unlike Bank of England deposits.
• The Bank believes that restricting holdings of sterling-denominated UK government debt to short-term maturities only will ensure consistency with emerging regimes in other jurisdictions. It would look to specify the maximum maturity of eligible assets in the draft Codes of Practice setting out the detailed requirements for systemic stablecoins that it plans to publish in 2026.
• The Bank is proposing that issuers who are considered systemic at launch, or who transition from the FCA’s non-systemic regime, will initially be able to hold up to 95% of backing assets in short-term UK government debt in order to support their viability as they grow. The percentage would be reduced to 60% once the stablecoin reaches a scale where this is appropriate to mitigate the risks posed by the stablecoin’s systemic importance without impacting the firm’s viability.
• For the remaining 40% of backing assets, as previously proposed the Bank will provide issuers with unremunerated accounts at the Bank of England – the objective being to ensure access to liquidity and ‘robust redemption and public confidence, even under stress’. In line with its view that systemic stablecoins should not be used as a means of investment, the Bank also considers that issuers under its regime should not pay interest to coinholders.
• The Bank would allow temporary deviations from the 40:60 split for firms to meet large unanticipated redemption requests. Systemic stablecoin issuers will need to notify the Bank if the requirement of holding at least 40% in central bank deposits is breached and provide a plan to rebalance backing assets in a reasonable timeframe. It intends to provide more guidance on its expectations on maintaining the 40:60 split in the next phase of the consultation planned for 2026.
• There is also a new proposal under which the Bank is considering central bank liquidity arrangements to support systemic stablecoin issuers in times of stress - providing a backstop if systemic issuers are unable to monetise their backing assets in private markets and thereby reinforcing financial stability.

Holding limits

• Another key industry concern from the 2023 discussion paper was the Bank’s position on holding limits. It did not propose a specific level for the limit but cross-referred to the proposed range for the digital pound which was consulted on in 2023 for individual holding limits (£10,000–£20,000).
• The Bank is now proposing temporary holding limits of £20,000 per coin for individuals and £10 million for businesses. The limits would not apply to stablecoins used for settling wholesale financial market transactions in the Bank and FCA’s Digital Securities Sandbox (DSS) (see further below ‘Emerging policy areas on which the Bank invites further industry engagement’).
• However, the Bank proposes that there could be exemptions from the proposed £10 million business limit if the business requires balances above it in the course of doing normal business. It also expects to loosen and ultimately remove the holding limits as it gains ‘sufficient comfort that financial stability risks have been suitably understood and mitigated’.
• In conjunction with the consultation paper, the Bank has published an approach to quantifying the risks to the provision of finance to the economy from potentially significant and rapid outflows of bank deposits into new forms of digital money. It notes that this analysis has shaped the proposed holding limits, but is keen to highlight that it also remains open to views on alternative tools that could help achieve its desired outcomes of avoiding a disorderly transition, safeguarding financial and monetary stability, and preserving access to credit, while ensuring continued innovation in payments and money.
• The Bank acknowledges that a particular area of challenge for its policy on holding limits is the transition between the Bank and FCA regimes, where there could be impacts for:
  • Issuers, who would be required to make changes to the technical stablecoin smart contract and possibly other features of their business to implement and comply with the policy; and
  • Businesses and consumers, who would be presented with a holding limit when the stablecoin they use is recognised as systemic.

It welcomes views and suggestions for how these transitional challenges could be tackled.

Capital and reserve requirements

• In light of feedback to the 2023 discussion paper and the proposed changes to the backing assets model (see above), the Bank has revised its proposals for capital and reserve requirements. Key points include:
  • The Bank continues to propose to use existing international standards (ie the PFMI) as its baseline for capital requirements for general business risk of systemic stablecoin issuers, with some modifications to account for shortfall risk to coinholders and lack of comprehensive arrangements to manage an issuer’s failure.
  • It proposes that issuers hold capital against general business risk, and reserves held on trust to mitigate financial risk and wind-down costs.
  • It is also proposing to maintain its policy that the assets funded by capital and reserves held on trust should be held in the UK.
  • The operational risk buffer has been removed from the shortfall reserve held on trust, as the Bank agreed with respondents that such risks could be mitigated by capital held for general business risk. It makes the point that this change should increase the resources available to the issuer to mitigate general business risks.
  • Capital is set as the higher of:
    • The cost of recovery from the largest plausible loss event; or
    • Six months of current operating expenses.
  • Capital should be in paid up capital, share premium, retained earnings and disclosed reserves (largely in line with Common Equity Tier 1 (CET1) capital).
  • Assets funded by capital must be high quality and sufficiently liquid for the risks they intend to mitigate.
  • Issuers should maintain reserves of high-quality liquid assets to mitigate the financial risk of backing assets and cost of insolvency/wind down. The reserves should be held on trust for the benefit of coinholders and insolvency practitioners.

Legal claim and redemption

• The Bank proposes to maintain its policy from the 2023 discussion paper that all coinholders have a robust legal claim on the issuer for the funds they hold. Issuers must honour redemption requests by the end of the business day on which a valid request is made (which is also in line with international PFMI standards that apply to all systemic payment systems and further PFMI guidance for stablecoins).
• The Bank emphasises that it considers this to be ‘one of the key elements’ of the new regulatory framework that supports the coin’s stability of value and contributes to maintaining trust and confidence in money.

Direct payment system access

• There is a new expectation that systemic stablecoin issuers would be able to directly access payment systems that support interoperability across different forms of money, rather than through a sponsoring participant. This would support frictionless redemptions.

Clarification on fees

• The Bank has clarified that fees should not be used as a mechanism to disincentivise the redemption of the coins. It states that issuers must not use fees to pass on any costs or losses arising from the sale of assets in the backing asset pool as part of meeting redemptions.

Safeguarding of backing assets and reserves

• The Bank proposes to maintain its overarching policy that backing assets should be held in the UK and held on statutory trust for the benefit of coinholders. As a result of the revised backing model (see above), it has provided further clarification on its proposed requirements:
  • Issuers must appoint qualified third parties for the safeguarding of backing assets, other than for those held with the Bank.
  • Reserves of liquid assets for financial risk and insolvency/wind-down costs must also be held on statutory trust for the benefit of coinholders and insolvency practitioners.

Use of public permissionless ledgers

• The Bank clarifies that it is open to the use of public permissionless ledgers by systemic stablecoin issuers, provided that they can meet its expectations and ensure confidence and trust in money. However, it wants to continue its industry engagement to better understand potential solutions and/or mitigants to resultant risks in relation to accountability, settlement finality, and operational resilience, including cybersecurity.

Managing failure of systemic stablecoin issuers

• The Bank will continue working with HMT and the FCA to consider the most appropriate interim and comprehensive long-term solutions for managing failure of a systemic stablecoin issuer.

Emerging policy areas on which the Bank invites further industry engagement

Respondents are invited to provide general comments or suggestions on:

• Interoperability in money and payments: As outlined in a September 2025 speech (see this Our Thinking article), the Bank’s vision for the future of the UK’s payments landscape is one of a ‘multi-money’ mixed ecosystem where different forms of money - including stablecoins - coexist to maximise benefits for households and businesses, underpinned by the continuing role of central bank money at the heart of the financial system. Interoperability in terms of both technical infrastructure and regulatory standards will be key to the success of this vision. The Payments Vision Delivery Committee (PVDC), which is leading the government’s National Payments Vision, has published its strategy for the future retail payments infrastructure to be designed by the Retail Payments Infrastructure Board (RPIB) which is chaired by the Bank. One of the outcomes from the strategy is that payments operate seamlessly as part of a diverse multi-money ecosystem, with interoperability between new and existing forms of digital money - including traditional commercial bank money, e-money, tokenised deposits, and stablecoins (as well as other new forms of digital money yet to be developed).
• Approaches to innovation in wholesale markets: While the Bank reiterates its low risk appetite for a significant shift away from settlement in central bank money towards settlement in privately issued money, it states that it is open to the potential role of regulated stablecoins in supporting innovation within wholesale financial markets:
  • The Bank and the FCA are exploring how regulated stablecoins could enable on-chain settlement by providing the payment leg for transactions within the DSS. If this proves successful, the Bank would expect to recommend to HMT that the issuer of stablecoins used for settlement in core wholesale financial markets is recognised as either a payment system or service provider (where relevant). If HMT agrees, it would be jointly regulated by the Bank under the proposed new systemic stablecoins regime) and by the FCA under its authorisation regime for qualifying stablecoin issuers.
  • As the operator of RT2, the renewed RTGS service, the Bank is exploring solutions that can make central bank money settlement compatible with new and emerging technologies:
    • The Bank will run a Synchronisation Lab next year to help it progress towards delivery of a live synchronisation capability in RT2. It is inviting organisations interested in becoming a synchronisation operator to apply to participate in the Synchronisation Lab by 28 November 2025.
    • There is also a wholesale experimentation programme that explores different ways of settling payments using central bank money in innovative payment systems, with a focus on understanding where wholesale central bank digital currency could offer meaningful advantages over synchronisation.
• Cross-border arrangements: The Bank has maintained its position from the 2023 discussion paper that non-UK based issuers of sterling-denominated stablecoins recognised by HMT as systemic must set up a subsidiary in the UK, and that subsidiary must hold backing assets and assets funded by capital in the UK. Since the 2023 paper, the Bank has further considered its approach to non-sterling-denominated stablecoins that could become systemic in the UK. This follows the approach taken by the PRA in supervising international banks with significant retail activity. For non-sterling-denominated systemic stablecoins issued from non-UK entities, the Bank considers that the first step would be to engage with the stablecoin issuer’s home authority. Following this, one of the options includes deferring to the home authority’s regulatory and supervisory framework if it delivers broadly similar outcomes to the Bank’s regime for systemic stablecoins, and the Bank is satisfied that there are sufficient co-operation arrangements in place. Deferring to another authority would only be possible where it does not put UK financial stability at risk. It notes that this is in line with its existing regulatory and supervisory practices for non-UK FMIs, including CCPs and systemic payment systems and the PRA’s approach to supervising international banks.

What’s next?

The consultation closes on 10 February 2026, after which the Bank will consider feedback before consulting on and finalising Codes of Practice (CoPs) later in 2026. The CoPs will set out the detailed requirements for systemic stablecoins. Also in 2026, the Bank and the FCA will publish a joint approach document to clarify how rules will apply in practice and support a smooth transition between the non-systemic and systemic stablecoin regimes.

The rise of digital currencies is one of the topics on the agenda for the Hogan Lovells Payments Conference, which is taking place on Thursday 20 November 2025. To take a look at the current agenda and register your interest in attending, please click here.

Authored by Sinéad Meany and Virginia Montgomery.