New Proposals Reflect a Shift Towards Innovation and Financial Stability
The Bank of England has unveiled updated plans for regulating UK-based stablecoins, signalling a more flexible and innovation-friendly approach to digital payments. The revised proposals, outlined in a recent consultation paper, follow feedback from industry stakeholders that the Bank’s initial stance on stablecoin regulation was out of step with global regulatory trends and incompatible with the business models of stablecoin issuers.
In response to these concerns, the Bank has revised its policy in several key areas. Notably, it has modified its earlier proposal to restrict backing assets to central bank deposits only. The new plan calls for at least 40% of the stablecoin backing assets to be held as central bank deposits, with the remaining 60% to be held in short-term, sterling-denominated UK government debt securities. The Bank believes this approach will be more consistent with emerging international regulatory frameworks.
David Heffron, a financial services regulation expert at Pinsent Masons, commented that the revised proposals, which also include changes to capital and reserve requirements, would help ensure financial stability in UK markets. “The Bank of England’s reserve requirements for systemic stablecoins are among the most robust globally, mandating that a significant portion of backing assets be held at the central bank,” Heffron said. “While this approach is more prescriptive than those in the US or EU, it reflects the Bank’s clear priority on financial stability.”
The consultation paper also clarifies the Bank’s stance on issues such as systemic importance, holding limits, legal claims and redemptions, safeguarding backing assets and reserves, operational resilience, and the role of service providers.
Holding Limits and Exemptions
A key aspect of the Bank’s updated approach is the introduction of transitional holding limits for stablecoins. The proposal includes a £20,000 holding limit for individuals and £10 million for businesses, with the aim of preventing rapid outflows from bank deposits that could destabilise the financial system. The Bank provided an example in the consultation paper, explaining how an individual could hold up to £80,000 across four different systemic stablecoins at one time.
Josie Day, a financial services regulation expert at Pinsent Masons, explained that the Bank’s policy aims to support an orderly transition to systemic sterling-denominated stablecoins while mitigating risks to the banking sector. “Policy drivers for the Bank here are supporting an orderly transition to systemic stablecoins, while also addressing concerns about potential outflows from bank deposits, which could harm banks’ ability to provide credit and increase costs,” Day said.
The Bank has indicated that larger retail businesses, such as supermarkets or crypto-asset trading platforms, could be exempt from the business holding limit if higher balances are required for their normal operations. Additionally, the Bank has stated that it expects to loosen, and eventually remove, such limits once financial stability risks have been properly understood and mitigated. It is also considering offering a central bank lending facility as a backstop for eligible and viable systemic stablecoin issuers if needed.
Impact on the UK’s Competitive Position
Heffron noted that the £10 million holding limit for businesses sets the UK apart from other jurisdictions, but the potential exemption for larger companies would be a positive step. “The exemption for retailers and intermediaries is a notable divergence, recognising the operational needs of certain market participants,” he said. “It will be interesting to see how this approach works in practice, particularly as the market adapts and the regulatory framework evolves.”
Some aspects of the Bank’s approach, as outlined in its 2023 discussion paper, remain unchanged. These include a ban on systemic stablecoin issuers paying interest to coinholders, a UK location policy for non-UK-based issuers, and joint regulation with the Financial Conduct Authority (FCA) to be consulted on next year. The paper also highlights three new focus areas for the regulatory regime: interoperability in money and payments, innovation in wholesale markets, and cross-border arrangements.
The consultation period is open until 10 February 2026, and the Bank expects to finalise the rules for the UK’s systemic sterling-denominated stablecoin regulatory framework later that year.
A Flexible, Future-Focused Approach
Heffron concluded that the Bank’s modified stance on stablecoins represents a significant shift towards a more dynamic, innovation-friendly regulatory environment. “The Bank of England’s stance on stablecoins has clearly evolved — from initial scepticism and stringent proposals to a more nuanced, innovation-friendly approach,” he said. “By engaging with industry feedback and signalling openness to new technology, the Bank is positioning itself to both safeguard financial stability and foster a dynamic digital payments landscape. The willingness to adapt its regulatory framework as the market develops is a positive sign for the future of digital finance in the UK.”
However, Heffron cautioned that the unique holding limits and compliance requirements could “test the competitiveness” of the UK’s stablecoin regime in the global market.