Last month the Bank of England published its final policy stance and proposed rules for sterling stablecoins that could become systemically important for the UK economy. The objective is to find the best compromise between innovation, economic stability, and international competitiveness.
The new policy positions have dropped the previously proposed user-level holding caps, instead replacing them with an issuer-level guardrail. In this case, that guardrail is a £40 billion system-wide ceiling for each token, thus placing restrictions on the market as a whole rather than customers directly. As dollar stablecoins gain more attention in the US, the shift is a response to industry demand for stablecoins to become a viable payment instrument, albeit without allowing risking a situation where unfettered growth could destabilize the wider economy.
The framework only concerns stablecoins that become systemic in UK payments. Systemic stablecoins are significant because their scale is large enough that their failure could disrupt the wider financial system. By contrast, standard stablecoins are used primarily inside crypto markets, so they pose different risks from those that could become widely used in salaries, retail payments, or corporate settlement.
The Bank of England nonetheless retains its strict reserve requirements, up to 70% of which may be invested in short-term UK government debt, while the remainder would largely sit as non-interest-bearing central bank deposits. This is significant, because many stablecoin issues earn interest on the assets backing their tokens, so requiring 30% to earn no interest directly mitigates risk, but it also reduces the economics of operating at scale.
Many other jurisdictions allow a greater share of interest-bearing assets, thus putting UK policymakers under pressure to decide how much profitability can be made compatible with safety and economic stability. However, the stablecoin market is still relatively small in the UK compared to, for example, the US. As such, the £40 billion guardrail is highly precautionary, with the goal being to address future risk. On the other hand, critics say such an approach could prove disproportional, because the guardrails would come into play before the market has even developed. For instance, such a ceiling might discourage investment if issuers believe successful adoption will be capped.
The implication for banks is that they could provide reserve accounts, custody, settlement, and compliance services, while also issuing tokenized deposits or stablecoins through allowed structures. There are potential opportunities for payment and other fintech companies too, which could build wallets and merchant services around regulated tokens. This would allow them to compete more directly with card and settlement rails rather than savings accounts alone.
Despite the promise of stablecoins, such as faster and cheaper settlements and global accessibility, issues remain that may prove difficult to resolve. Public perception is one of the overarching challenges, because many people assume stablecoins are nothing more than speculative crypto assets. To succeed, that perception would need to change, with stablecoins being viewed as redeemable money.
While the Bank of England has now set its final policy positions, the Code of Practice remains in draft and subject to consultation, with responses invited until September 22. However, if consultation and legislation proceed smoothly, regulated stablecoin products could start appearing on the UK market as early as next year.