Bank of England publishes consultation paper on proposed regulatory regime for sterling-backed systemic stablecoins

Key points:

• A consultation was launched on 10 November 2025 by the Bank of England setting out a proposed regime for regulating stablecoins and their issuers who have systemic importance to the UK’s financial system. The consultation follows the Bank’s 2023 discussion paper on the same subject.
• HM Treasury has the power to recognise system operators and service providers as being of systemic importance to the UK, although none have been recognised yet.
• For systemic sterling-backed stablecoins, backing assets must be held as short-term government debt (60% max) and as unremunerated central bank deposits (at least 40%). The Bank has ruled out allowing systemic stablecoins to rely on commercial bank deposits as backing assets.
• Issuers of systemic stablecoins cannot generate interest on the 40% held in central bank deposits and cannot pay interest to coin holders.
• There are very low caps limiting the number of stablecoins that can be held by individuals (£20,000) and businesses (£10 million).
• The UK regime is much more restrictive for issuers and holders of stablecoins than in the EU under MiCAR and the US under GENIUS.
• There is a separate but complementary FCA regime being developed for all stablecoins as part of the UK’s two-tier regulatory approach.

Introduction

Systemic stablecoins are a relatively new type of digital money designed to be used for retail payments and wholesale settlement.   Advocates point to their use in systems with faster transaction times and lower fees when compared to movements of fiat currency within the traditional banking system.  Those looking further into the future seem them as fuel for AI-driven machine to machine commerce.

They are the topic du jour in financial services and regulatory circles.  A concern for the Bank of England and for other regulators is that use of stablecoins will eat away at fiat deposits and undermine the workings of the traditional finance system.

London is a global financial hub for traditional financial services and its contribution to the UK’s gross domestic product is amongst the highest relative to other developed nations.   Around 20% of London’s total economic activity is in the financial sector.  Financial services makes up around 12% of the UK’s gross domestic product.

The Bank and the FCA do not want to let in a flood of crypto activity and thereby dilute the prevalence of traditional finance only to let the baby out with the bathwater to see London and the UK’s position in world finance diluted as a result.

Singleness of money

The Bank is proposing to align the regulation of systemic sterling-backed stablecoins – i.e. coins backed 1:1 with £1.00 – with that of existing systemic payment systems.  The usual motto applies: same risk, same regulatory outcome; i.e. stablecoins performing systemic payment functions should face equivalent safeguards to traditional money-based systems.  The Bank is clearly concerned with the ‘singleness of money’: £1 as a stablecoin must be as good as £1 in a bank account.

What is at stake for the Bank is public trust in money, and with it the continuing viability of the traditional banking systems.

If at this stage you are wondering what at a conceptual level a stablecoin is, please do pause to read HLaw’s FAQs on the subject.

November 2025 consultation

In his forward to the Bank’s consultation on a proposed regulatory regime for sterling-backed stablecoins published on 10 November 2025, Andrew Bailey, Governor of the Bank of England, said:

“Since publishing our discussion paper on our regime in 2023, we have engaged extensively with industry and other stakeholders. We have listened carefully to and are grateful for the feedback received, which has shaped the proposals we are consulting on … Following this consultation, we will consider the feedback received before consulting on and finalising our rules in 2026.”

Writing in the Financial Times in September 2025, Bailey had said that it would be “wrong to be against stablecoins as a matter of principle”, but he and the Bank are adopting a very cautious approach indeed.

UK will be a tough place to build a systemic stablecoin

What is clear is that issuers of systemic sterling-backed stablecoins are not going to be given an easy ride: the backing assets all have to be held as short-term government debt (60% max) and non-interest bearing central bank deposits (at least 40%).  And there are very low caps limiting the number of stablecoins that can be held by individuals (£20,000) and businesses (£10 million), albeit these are described as temporary holding limits to be reviewed going forward in line with developments in the systemic risk profile.

These are restrictions not introduced by regulators in other major jurisdictions.  Clearly, launching a stablecoin in the UK is much less commercially attractive than launching in other jurisdictions.  And yet the current market capitalisation of sterling-backed stablecoins is barely visible at any scale.  Query then at this point whether in fact there will ever be a systemic sterling-backed stablecoin that the Bank will be needing to regulate.

Expansion of perimeter to include DSAs and systemic stablecoins

The Bank’s regulatory remit was expanded to cover digital settlement assets (“DSAs”) – including systemic stablecoins – by The Financial Services and Markets Act 2023 (“FSMA 23”).  A DSA is defined in section 22 of FSMA 23 as “a digital representation of value or rights, whether or not cryptographically secured, that—

• can be used for the settlement of payment obligations,

• can be transferred, stored or traded electronically, and

• uses technology supporting the recording or storage of data (which may include distributed ledger technology).”

There is no definition of systemic stablecoin in FSMA 23 itself, but HM Treasury has the power (under the Banking Act 2009 as amended by FSMA 23) to recognise as ‘systemic’ payment systems that are widely used and which may pose risks to or affect confidence in the UK financial system.  HM Treasury also has the power to recognise service providers as being systemic.

Overseas issuers of sterling-backed stablecoins could be brought within scope and recognised as systemic by HM Treasury.   If so, they would be required to incorporate a UK subsidiary and hold assets backing the stablecoins within the UK in the same way as UK issuers.   The Bank notes that systemic recognition may apply even if the issuer is not directly targeting the UK.

FCA and non-systemic regime

Non-systemic stablecoins will be regulated by the FCA – cryptoasset businesses are already supervised by the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, but as yet there is no bespoke regime for stablecoins in the UK as there is in the EU under MiCAR (now in force) or as is coming into force in the US under the GENIUS Act.

The FCA’s proposals are set out in consultation papers CP25/14 and CP25/15 and the plan is to bring fiat-backed stablecoin issuance and custody within the FCA’s regulatory perimeter.

Issuers of systemic sterling-backed stablecoins will need to comply with both the Bank of England and the FCA regime.  To issue even a non-systemic fiat stablecoin in the UK, firms will need to be authorised by the FCA (likely as a new category of “qualifying stablecoin issuer”) once the FSMA 2023 reforms take effect.

The Bank and FCA are expected to publish a joint approach document in 2026 to explain how a stablecoin moves from FCA to BoE supervision when it becomes systemic.  The inter-regulator handover process is likely to be complex and to introduce yet more complexity into a highly-involved regime.

Unsurprisingly, no systemic stablecoins recognised as yet

At time of writing, HM Treasury has not recognised any stablecoins in that category – the list was last updated in August 2022 and recognises Mastercard, Visa, Bacs, CHAPS and others, but no stablecoins and no DSA service providers at all.

This is unsurprising because at time of writing the value of the market capitalisation of all sterling denominated stablecoins – i.e. the aggregate supply of them multiplied by their £1.00 peg – is somewhere in the region of only $0.5 million at time of reading.  Most of that is made up by VNX British Pound issued on the Ethereum blockchain.  Other sterling stablecoins have market caps in the tens of thousands of pounds.

To put that in perspective, the value of the market capitalisation of all stablecoins worldwide is at time of writing somewhere around $300 billion and those denominated in sterling currently round down to zero per cent.

The very vast majority of stablecoins are denominated in US dollars.  Zooming out even further, the quantity of money in supply in the United Kingdom – what’s called “M4” – was approximately £3.18 trillion in September 2025 (so £3,140 billion or £3,180,847 million).

Bank of England preparing for sterling-backed stablecoins nonetheless

Nevertheless, the November 2025 consultation sets out how the Bank proposes to regulate systemic stablecoins that are denominated in sterling as and when those are recognised by HM Treasury.  As the paper says, this is an important step in “a future where new forms of digital money may be widely used for payments alongside existing ones”.

The consultation paper contains a number of headline-grabbing policy proposals.

Holding limits

The Bank is proposing temporary holding limits – i.e. caps – of £20,000 in coins for individuals and £10 million in coins for businesses, those limits to be “removed once the transition no longer poses risks to the provision of finance to the real economy.”    

Detail as to how those limits were calculated and why they have been set at those levels to manage systemic risk can be found in the Bank’s financial stability paper (No. 53) also published on 10 November 2025.  The Bank sees the caps as a transitional measure to be maintained and adapted whilst the systemic risk to the wider financial system is better understood.

Note that issuers of systemic stablecoins themselves may hold more than the £10 million limit for liquidity purposes.

The Bank notes that the £10 million threshold may be too low for some businesses and proposes to introduce an exemption regime with strict eligibility conditions attached.  Crypto exchanges and other types of affected payments businesses will be keen to see the detail and the process for obtaining the exemption.

The limits would not apply to stablecoins used for settling wholesale financial market transactions in the Bank and FCA’s Digital Securities Sandbox.

Backing assets and returns for issuers

Once an issuer is recognised as systemic, the Bank will directly regulate how that issuer holds the assets required to keep the stablecoins pegged to their nominal value.

Up to 60% of the assets will be permitted to be held in short term government debt (i.e. gilts or treasury bills).  These instruments are interest-bearing and the issuer would earn a modest return depending on the prevailing yield curve.

The other 40% must be held in held in non-interest bearing central bank accounts, what are called unremunerated accounts.  Issuers will not be permitted to rely on commercial bank deposits as backing assets.

The Bank wants holders of systemic stablecoins to be entitled and able to withdraw their funds on demand at their face value with redemption taking place on the same day that the request goes in.  The consultation will collect operational feedback and T+0 redemption may not end up being universal in the Codes of Practice when published, but we will see.

Holders of stablecoins will have a direct claim against the issuer for redemption in the same way that fiat deposit holders have a claim against the bank holding the deposit.  However, FSCS deposit protection does not apply to stablecoins and there are no plans it seems to introduce it.

Issuers will be able to charge fees relating to the redemption process, but issuers cannot pass on any losses or haircuts arising from the sale of the assets required to effect the redemption.  Redemption may be effected via redemption agents.

New systemic issuers or those transitioning from the FCA regime might get some flexibility.  The Bank proposed that a newly recognised stablecoin issuer could initially hold up to 95% in government debt (on which there are some relatively modest returns), rather than immediately dropping to the 60% limit.

UK as an outlier in requiring deposits to be held in a central bank

The Bank has rowed back from prior indications that it would require systemic stablecoins to be 100% backed by those cash deposits at the Bank.  Respondents to the 2023 discussion paper had raised concerns that being unable to generate returns on the assets held would make the stablecoins issuer model non-viable.

Critics will say that this is not much of an improvement and no other major financial regulator has imposed or is publicly seeking to impose the same restrictions and requirements.  Issuers of systemic sterling-backed stablecoins will be competing with issuers of other types of stablecoins who can generate vastly more attractive returns from the backing assets.

Under MiCAR, stablecoins must be backed by high quality liquid assets but they do not have to be held with the central bank and there is not a requirement for unremunerated accounts.  The GENIUS Act allows issuers of US dollar-denominated stablecoins issued by federally-licensed entities to hold reserves in bank accounts, treasury securities, and other approved safe assets – deposits do not need to be held with the Federal Reserve.

The Bank acknowledges that a viable business model for issuers may not be able to rely only on returns generated from holding the assets.

Capital and reserve requirements

Within the proposals there are also capital and reserve requirements for that 60% in backing assets held as short-term government debt to cover potential value fluctuations or credit risk in the gilts and treasury bills as well as issuer wind down costs.

The proposals suggest that the Bank is also considering offering liquidity facilities to systemic stablecoin issuers in stress scenarios, the Bank to then be lender of last resort although this is not yet confirmed.

Interest bearing stablecoins not permitted

The Bank also confirmed its position that issuers will not be permitted to offer interest to holders of stablecoins to prevent them from being treated like fiat bank accounts or investments.  To that extent, interest bearing fiat bank deposits will have the advantage over sterling-backed systemic stablecoins even if settlement remains slower and other blockchain-driven efficiencies are absent.

Non-sterling systemic stablecoins

Non-sterling systemic stablecoins that become systemic in the UK would be approached by the Bank under the same proposal, although the Bank will first engage with the stablecoin issuer’s home regulator.

That though comes with some level of geo-political risk.  Query how much influence UK regulators are going to have with their equivalents in the US and elsewhere and what tools will be at their disposal as regards persuading them to listen to what they have to say.  The UK could ban holdings of certain coins, but we have seen this before in other jurisdictions with cryptocurrencies generally and it has seldom proved to be an effective way of making progress with reform and has generally been undermined by the use of cross-border platforms and decentralised protocols, and by sustained user demand generally.

FMI framework

The Bank has also proposed that systemic stablecoin arrangements may be subject to oversight under the existing Financial Market Infrastructure (“FMI”) framework.  Where a systemic stablecoin arrangement is designated as a Recognised Payment System under Part 5 of the Banking Act 2009, the Bank could exercise FMI supervisory powers in addition to its prudential regime.

This means obligations and standards applied to traditional systemic payment systems (such as governance, risk management, and operational resilience) may also apply to stablecoins.  The Bank acknowledges that FMI oversight would be applied proportionately and alongside other requirements, reflecting the dual role systemic stablecoins may play as both settlement assets and payment systems.

Wallet providers and service providers

The consultation flags that wallet providers and other technical service providers involved in stablecoin issuance may also fall under regulation if they are critical to systemic functionality.

Concluding thoughts

The consultation’s response period closes in February 2026, with legally-binding Codes of Practice (with statutory weight under the amended Banking Act 2009) scheduled to follow by the end of 2026.  Query if founders considering whether to launch sterling-backed stablecoins will take the time to engage with that is an extremely detailed set of restrictive proposals.

Critics of the Bank have been swift to point out that other jurisdictions have proposed or already put in place less restrictive regimes and do not have limits on the quantum of stablecoins that retail and businesses can hold.

And who are those sterling-backed stablecoin issuers?  Certainly none of them are yet household names.  If the restrictions push stablecoin issuers offshore and away from pegging to sterling, there may not be anyone much systemic for the Bank to regulate and instead it will be spending all its time in discussions with US and EU regulators trying to manage the risk that stablecoins denominated in their currencies pose to the UK financial system.  Perhaps the regime will be made less restrictive over time, but the risk is that the horse has bolted from the stable to flee to more permissive jurisdictions.

This Insight piece was written by Henry Humphreys with input from Alina Merchant-Mohamed.  If you have any questions relating to stablecoins, crypto and Web3 generally or other relevant matters, do please reach out to them or to another member of the team here at HLaw.

All the thoughts and commentary that HLaw publishes on this website, including those set out above, are subject to the terms and conditions of use of this website.  None of the above constitutes legal advice and is not to be relied upon.  Much of the above will no doubt fall out of date and conflict with future law and practice one day.  None of the above should be relied upon.  Always seek your own independent professional advice.

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