The Bank of England has published its long-awaited consultation paper on a regulatory framework for sterling-denominated systemic stablecoins (the CP) – essentially, stablecoins that could become widely used for everyday payments and therefore may pose risks to UK financial stability. The proposals in the CP build on feedback the Bank received to the November 2023 Discussion Paper (which we covered here).

Once designated as “systemic” by HM Treasury, a stablecoin will fall under the joint regulatory oversight of the Bank and the Financial Conduct Authority (FCA). The CP details the Bank’s prudential framework, operating in parallel with the FCA’s regime, which will focus on conduct standards, consumer protection and market integrity.

For firms operating in or considering entry into the sterling stablecoin space, the CP marks another step toward a clear regulatory regime. However, the impact of the proposed regime will need to be considered carefully to avoid unintended consequences and industry participants should monitor developments closely as the Bank’s proposals are refined.

Background on the Bank’s regulatory approach to stablecoins

The Bank's core objective regarding systemic stablecoins is straightforward: if stablecoins are going to be used as money in the UK – competing with cash and commercial bank deposits – they must be equally safe and reliable. In its previous publications on money and payments, the Bank frames this as the “singleness of money” principle: all forms of money circulating in the economy should have the same value, be generally accepted and be interchangeable without loss of value.

The Bank’s regime is designed to maintain financial stability and enable systemic stablecoin issuers to operate viable business models. Its regulatory approach follows a “same risk, same regulatory outcome” principle. This doesn't mean stablecoin issuers will be regulated exactly like banks, but it does mean they must achieve equivalent levels of protection against loss of value and loss of confidence.

Proposed scope: who does the regime apply to?

The regime set out in the CP is intentionally narrow in scope. It focuses exclusively on:

• sterling-denominated stablecoins (i.e., not multi-currency or USD/EUR stablecoins);
• used for UK retail and corporate payments by households and businesses (use of systemic stablecoins in wholesale financial markets will be explored separately, via the Digital Securities Sandbox);
• at systemic scale (more on what that means below); and
• issued by non-banks (banks wanting to issue tokenised deposits or other new forms of digital money including stablecoins are subject to the approach set out in the PRA’s 2023 Dear CEO letter on innovations in the use by deposit takers of deposits, e-money and regulated stablecoins).

In terms of what is not covered, the CP confirms that the Bank’s proposed regime would not apply to stablecoins used exclusively as settlement assets for trading unbacked cryptoassets. This reflects the Financial Policy Committee’s ongoing assessment that, while the interconnectedness between unbacked cryptoasset markets and the real economy is increasing, it remains relatively limited.

Consequently, the Bank does not currently expect to recommend that HM Treasury designate such stablecoins as “systemic” – even if they grow large enough to meet the predefined thresholds, although the issuers would likely be solo-regulated by the FCA.

Regarding cryptoasset trading platforms, the Bank is not proposing requirements applicable to the activities typically carried on by such businesses at this stage. However, the Bank notes that cryptoasset trading platforms may be regulated as a service provider or payment system operator (where relevant and subject to HM Treasury recognition), if providing stablecoin custody or payments processing services in a systemic stablecoin payment chain. 

Defining "systemic"

Under Part 5 of the Banking Act 2009, HM Treasury has the power to specify a particular payment system as a recognised system. HM Treasury can recognise systems which are designed to facilitate or control the transfer of digital settlement assets (which includes systemic stablecoins). In considering whether an entity meets the recognition criteria, HM Treasury must have regard to a list of factors set out in the Banking Act. HM Treasury is required to consult the Bank (as well as the FCA and Payment Systems Regulator where relevant) as part of the recognition process. 

HM Treasury may also make regulations about recognition orders and recognition criteria for systemic payment systems and service providers, including those using stablecoins. A service provider could fall under the Bank’s regime because it is systemic in its own right (for example, a custodial wallet that provides services to multiple payment systems or stablecoin issuers) and is therefore recognised by HM Treasury as a service provider, or because it provides essential services to a recognised payment system or a service provider.

Once recognised by HM Treasury, operators and service providers will be subject to the Bank’s powers under the Banking Act.

In practice, the Bank will provide technical advice to HM Treasury regarding the systemic importance of payment systems and service providers using stablecoins. It may also recommend recognition of a stablecoin as “systemic at launch”.

We have long identified that one of the challenges with the regime is determining when a stablecoin crosses the line to a systemically important payment system. The Bank has deliberately avoided setting hard quantitative thresholds – such as minimum transaction volumes or user numbers – in favour of a holistic, case-by-case assessment grounded in qualitative judgment.

When providing information and advice to HM Treasury regarding a recommendation of whether a particular stablecoin should be considered to be systemic, the Bank will consider, among other things:

• scale: the number and value of transactions or stablecoins in circulation;
• the nature of use:  retail or wholesale application, time criticality and the issuer’s governance and organisational structure;
• substitutability: whether alternative systems could realistically process the same transactions, or whether constraints exist that would hinder continuity or service elsewhere;
• interconnectedness: links with other financial market infrastructures or use in government or market settlement; and
• monetary authority links: whether the payment system is used by the Bank as monetary authority (e.g. whether, by virtue of its links, the system could call into question the integrity of fiat currency).

Once recognised by HM Treasury, systemic stablecoin issuers would be subject to the Bank’s powers under the Banking Act, including to obtain information, issue Principles and Codes of Practice, give directions and take enforcement action for non-compliance.

Holding limits: a transitional guardrail for the economy

In one of its more interventionist proposals in the CP, the Bank plans to implement temporary, per-coin holding limits for users of systemic stablecoins. The proposed limits are £20,000 for individuals and £10 million for businesses. The “per-coin” limit means that an individual, for example, could hold £80,000 in total across four different stablecoins.

The Bank acknowledges that exemptions for businesses will be necessary in certain cases - the example used in the CP is where large numbers of individuals choose to use systemic stablecoins to pay for their shopping, supermarkets could build up balances larger than £10 million.

The primary rationale is to protect the wider banking system from two different disintermediation scenarios: a slow "transition to steady state" where deposits gradually move out of banks, potentially reducing credit supply over time, and a rapid "disintermediation in stress" where a banking crisis could trigger a sudden flight to the perceived safety of regulated stablecoins. The Bank has separately published a paper exploring the key financial stability considerations arising from sterling-denominated systemic stablecoins and a potential digital pound and assesses how holding limits could address these risks.

The holding limits are intended as a transitional safeguard, giving the financial system time to adapt as stablecoin adoption grows. The Bank has made clear that these thresholds are temporary and expects to loosen and ultimately remove them once it is satisfied that financial stability risks are well understood and mitigated.

Substantial changes to the backing assets proposal

One of the most significant policy developments in the CP is the Bank’s revisions to how systemic stablecoins must be backed. The 2023 Discussion Paper proposed that systemic stablecoins be 100% backed by unremunerated deposits at the Bank. Most respondents disagreed with that proposal and as a result, the Bank has made substantial changes to the backing assets proposal.

The Ban’s new proposal is that systemic stablecoin issuers will be permitted to hold up to 60% of their backing assets in short-term, sterling-denominated UK government debt securities, which the Bank notes is consistent with emerging regulatory regimes internationally. To enhance liquidity, issuers may lend (but not borrow) these securities via repurchase agreements. In addition, the Bank is considering access to a backstop lending facility for eligible, solvent, and viable systemic issuers. This facility would allow lending against UK government securities in limited circumstances to help issuers monetise assets quickly, particularly under stress.

At least 40% of backing assets must still be held as unremunerated deposits at the Bank, ensuring a highly liquid buffer is always available. The Bank justifies keeping these deposits unremunerated on the basis that, unlike commercial banks, stablecoin issuers play a very limited role in the transmission of monetary policy, which is the primary rationale for paying interest on central bank reserves held by commercial banks.

Temporary deviations from the 40% floor would be permitted where issuers need to meet large or unexpected redemption requests, although the issuers would need to notify the Bank and submit a plan to rebalance backing assets within a reasonable timeframe. Further guidance on these requirements is expected in the future.

To encourage scalability and innovation, the Bank has proposed a “step-up” regime for issuers recognised by HM Treasury "systemic at launch." These issuers could be allowed to hold as much as 95% of their backing assets in UK government debt initially while scaling, with the proportion reduced to the standard 60% once the stablecoin reaches systemic size.

Overall, this policy change shows the Bank’s willingness to consider commercial viability where this does not raise financial stability concerns, as well as taking into account similar regimes in other major jurisdictions. However, the complexity of the “step-up” regime and the conditions for its application will require careful consideration and early engagement with regulators.

No interest, limited rewards: preserving the payments purpose of stablecoins

The Bank intends to maintain its initial position from the 2023 Discussion Paper that systemic stablecoin issuers should not pay interest to coinholders. This reflects the Bank’s view that systemic stablecoins should primarily be used for payments and not as a means of investment – a stance consistent with approaches taken by regulators and legislators in comparable jurisdictions. The Bank notes that industry feedback on this point was broadly supportive, though relatively limited in volume.

The CP also highlights that the Bank is still assessing the treatment of non-interest “rewards” offered to users – such as points or rewards linked to transaction volumes. It remains unclear whether such reward structures will be permitted under the final regime, but the Bank indicates that it will continue to consider whether these will be permitted for systemic stablecoins.

Redemption rights

Under the CP’s proposals, coinholders would still be required to have a robust legal claim for the value of their stablecoins. The Bank proposes that redemption should occur:

• on demand (at any time);
• at par (without loss of value, minus only reasonable fees); and
• by the end of the business day on which a valid redemption request is made (and in real time wherever possible).

The Bank emphasises that there should be no undue restrictions or conditions preventing redemption. While it has stepped back from its earlier proposal to prohibit redemption fees, any such fees must be fair, transparent and proportionate to the actual costs incurred by the issuer or redemption service provider. Issuers are expected to provide redemptions free of charge wherever possible.

The Bank recognises different redemption models may operate in practice – for example, where intermediaries manage redemption on behalf of end users. However, the issuer will remain ultimately responsible for meeting all regulatory requirements, including ensuring direct redemption where requested.

While the Bank’s redemption framework appropriately prioritises consumer confidence and convertibility, it also raises practical and operational challenges for issuers. The requirement for same-day – or even real-time – redemption could create liquidity pressures in periods of market stress, particularly for issuers relying on government securities that may not be instantly realisable (although this should be mitigated by the proposals around backing assets). At the same time, the Bank’s decision to permit proportionate redemption fees suggests an acknowledgment of these operational realities.

Permissionless blockchains get a cautious green light

The Bank clarifies in the CP that the Bank is "open to the use of public permissionless ledgers" for systemic stablecoins. However, this comes with a strict caveat: the issuer of the stablecoin will remains fully and solely accountable for managing the inherent risks associated with these decentralised networks. The Bank is particularly focused on three core risks that issuers must mitigate to its satisfaction: the lack of clear accountability in a decentralised system, ensuring robust settlement finality, and maintaining the highest standards of operational resilience, including cybersecurity.

This position presents a potential challenge for issuers: it makes a regulated UK entity legally and operationally accountable for the resilience and finality of a decentralised global network over which it may not have any direct control. We expect that potential issuers will need to demonstrate exceptionally robust risk mitigation frameworks to satisfy the Bank on this point.

Capital and safeguarding: strengthening resilience and redemption confidence

Even with 40% or more central bank deposit backing, systemic stablecoin issuers remain exposed to operational risk and distribution costs in the event of distress. The Bank proposes to mitigate these vulnerabilities through proportionate and risk-based capital and safeguarding requirements.

Capital

The Bank proposes to continue using existing international standards set out in the CPMI-IOSCO Principles for Financial Market Infrastructures as the baseline for capital requirements. Issuers are required to maintain general business risk capital to ensure continuity of operations, set as the higher of the cost of recovery from the largest plausible loss event or six months of current operating expenses. This capital should be in paid up capital, share premium, retained earnings and disclosed reserves (largely in line with CET1).

Reserves of liquid assets

The CP also sets out that issuers would be required to hold two specific reserves of high-quality liquid assets on statutory trust for the benefit of coinholders and insolvency practitioners, intended to mitigate financial risk of backing assets and wind-down costs. The proposed reserves are:

• financial risk reserve to mitigate market risk of the backing assets and the potential price impact when monetising them under stress; and
• insolvency/wind-down reserve to cover the costs of appointing an insolvency practitioner, continuing critical services, and/or returning or transferring funds to coinholders.

In response to industry feedback, the Bank has revised the structure by removing the requirement to hold an operational risk buffer within the trust-held reserve, as the Bank agreed with respondents that those risks could be mitigated by capital held for general business risk.

Safeguarding

The Bank’s proposal regarding safeguarding requirements focuses on segregation and the establishment of a statutory trust to ensure coinholders' proprietary claims against issuers are protected in both going-concern and gone-concern scenarios.

For the safeguarding of backing assets other than those held in deposit with the Bank, the Bank’s proposal is that issuers should be required to appoint a qualified third-party custodian, who is a separate legal entity.  The CP provides that the qualified third-party custodian must be authorised and regulated in the UK. Issuers (as trustees) retain legal responsibility for the backing assets. There will also be robust safeguarding rules which would cover segregation of backing assets and reserves, reconciliation with issued stablecoins and addressing discrepancies, shortfalls and removing excess from the backing asset and reserves pool.

The Bank will consult further on the detailed design of the safeguarding regime in 2026.

Location policy

The Bank is proposing that non-UK based issuers of sterling-denominated stablecoins recognised as systemic must set up a subsidiary in the UK. That subsidiary would be responsible for holding backing assets and for assets funded by capital in the UK.  

The Bank has also set out its considerations for non-sterling denominated stablecoins that could become systemic in the UK – these may pose risks to financial stability, so the Bank has been considering how best to mitigate those risks. The Bank has indicated that it would first engage with the issuer’s home regulatory authority.

Following that engagement, one of the options that the Bank could consider includes deferring to the home authority’s regulatory and supervisory framework, which would be possible if the home regime delivers "broadly similar outcomes" to the UK's framework and if the Bank is satisfied that there are sufficient co-operation arrangements between the Bank and the home authority.

The CP contains a list of indicative factors the Bank would consider in making its decision on whether to defer to the home authority. However, the Bank considers deferring to another authority is only possible where it does not put UK financial stability at risk – if the Bank found that another authority’s regime did not deliver broadly similar outcomes to the Bank’s regime or if the Bank concluded that co-operation arrangements were not sufficient, it would seek to apply alternative measures to safeguard UK financial stability.

Multiple regulators: navigating the landscape

Systemic stablecoin entities will likely face multi-regulator oversight from the Bank, the FCA and the PRA. Firms may transition from solo FCA regulation (as non-systemic stablecoin issuers) to dual Bank/FCA regulation as they grow. The Bank notes that it has been working closely with the FCA to develop a clear and co-ordinated regulatory framework for systemic stablecoins and service providers in the UK that may fall under the joint regulatory framework. The CP explains that in 2026 the Bank intends to publish and jointly consult with the FCA on the detailed design of the joint regulatory framework, which will include a transparent and predictable pathway for firms as they prepare to operate under the new regime.

Next steps

The consultation period closes on 12 February 2026, after which the Bank will review industry feedback and refine its proposed framework. The Bank’s policy statement, its rules consultation and the Bank-FCA approach to joint regulation consultation are expected in H1 2026.

For firms active in or considering entry into the UK stablecoin market, this is a crucial moment to engage early with policymakers, especially the Bank. Firms should therefore begin assessing their backing and redemption models, whether they are likely to reach the threshold to be considered systemic and the operational feasibility of meeting same-day redemption and safeguarding obligations. Early engagement and proactive scenario planning will be essential for firms to position themselves for success.