Does the (Old) Lady (of Threadneedle Street) protect too much? The Bank of England recalibrates its approach to systemic stablecoins, but concerns remain

The Bank's regime will apply to stablecoins, and payment systems or DSA service providers using them, that are determined by HM Treasury (HMT) to be systemic and so "recognised" under Part 5 of the Banking Act 2009 (the 2009 Act).

As part of the recognition process, HMT is required to consult with the Bank (and the FCA) and have regard to relevant factors, including those set out in section 185 or (as the case may be) 185A of the 2009 Act.  In addition, while the Policy Statement is concerned predominantly with those stablecoins pegged to sterling,  there is a section that contemplates how the Bank would react to systemic non-sterling stablecoins. Much of the feedback to the original consultation paper sought more information about when a stablecoin would become "systemic", given that this is critical to understanding whether and when the requirements (and joint regulation by the Bank and the FCA) would apply. Non-systemic stablecoins will be regulated solely by the FCA.

The Bank seeks to address this issue in section 2.2.8 of its Policy Statement. However, perhaps unsurprisingly in light of the high-level at which the statutory criteria for recognition are drawn and the wider public policy issues in play in a highly dynamic market, limited granular guidance is provided by the Bank as to when a relevant payment system or DSA service provider is likely to be considered systemic for this purpose. 

In particular, firms hoping for "hard and fast" numerical thresholds will be disappointed; although the Bank has stressed that its £40 billion temporary issuance guardrail (per systemic stablecoin product) which, we discuss further below, should not be considered a proxy for any determination as to when a stablecoin crosses the threshold to become "systemic". On this, the Bank appears to invite consultees to take material comfort from the management of the proposed transition process as a firm moves from solo regulation by the FCA to dual regulation (a process that the Bank indicates it expects normally to take between 12-36 months). We await further information as to how the  two regimes will, in practice, interlock, through the publication of an "Approach to Joint Regulation of Systemic Stablecoin Issuers" document – which the Bank has promised will be published "shortly".

That said, as issuers' operations scale, and especially as the ways in which their stablecoins are used evolve and spread, we would urge them to seek legal advice, but also to engage closely with the Bank and HMT; always keeping as their north star whether the relevant stablecoin is being widely used for payments that go well beyond fiat/cryptocurrency on- and off-ramping.

In a previous briefing, Out on a limit: The Bank of England's systemic stablecoins consultation provokes and pleases in equal measure, we expressed concerns about the Bank's proposal for per-stablecoin caps of £20,000 for individuals, and £10 million for "businesses"; constraining the amount of any particular stablecoin that could be held. The Bank's rationale was to prevent deposit flight that could damage credit creation via fractional reserve banking.

The most welcome news by far, arising out of the Bank's Policy Statement, is that this proposal has been withdrawn in favour of an alternative policy solution – see section 2.1.2 of the Policy Statement. Interestingly, however, the Bank makes it quite clear that its enduring credit creation concern remains, and that it was the sector's arguments that the proposals were essentially unworkable in operational terms that has swayed the Bank.

The consequence of those two points is that a deeply unpopular proposal has been replaced by an idea that is somewhat less unpopular, but still unlikely to be welcomed by potential issuers: the "temporary issuance guardrail". This is summarised by the Bank as "We will allow each systemic stablecoin to be subject to an initial maximum issuance of £40 billion." This will be subject to ongoing review, and the Bank expects to loosen and "ultimately remove" this temporary guardrail.  

Philosophically, we continue to have reservations about a hard cap on the number/value of sterling-denominated stablecoins that an issuer can put into circulation. One concern we continue to have is the idea of it being "temporary", as that simply raises questions around its duration and how or when the Bank would decide to remove it. From a competition angle, it would seem undesirable to keep applying this temporary issuance guardrail to new entrants once it has been removed from existing issuers (indeed, when looked at that way, it is a massive advantage to incumbents once it only applies to others). Looking at it through the Bank's financial stability objective lens, limiting supply could in theory lead to upward pressure on the secondary market price of the most successful and widely-adopted stablecoins; and, as recognised by the Bank itself in section 2.1.2 of the Policy Statement (but described by it as "manageable"), lead to "de-pegging risk".  

That said, £40 billion per stablecoin issuance is materially higher than the entire market capitalisation of all GBP stablecoins today (which is not even in the billions). For a degree of context, the total deposits in the most recent financial statements of the Skipton Building Society, the UK's fourth-largest building society, were over £30 billion. As the Bank explains, its analysis suggests this would support the viability of systemic GBP stablecoins in payments, as it should support daily transaction volumes comparable to Faster Payments and the card schemes (which fall into the range of £1.4-£2.2 billion), and is around 10% of average daily values in CHAPS.

The practical reality is that this new proposal avoids the huge operational and data challenge of establishing per-holder limits (as well as the technical complexity of applying whatever exemptions that may have been devised to the £10 million cap for businesses). It should give issuers a runway along which to continue to advocate that they never actually have to suspend issuing – if it takes years for any one systemic stablecoin to get close to £40 billion, the guardrail might even be taken away before it is hit. 

It will be a great relief to the sterling stablecoin market that the Bank has moved a considerable way from its original proposal, as set out in its November 2023 discussion paper, that systemic stablecoins would need to be backed 100% by unremunerated Bank deposits. To put it another way, the amount of return that issuers could earn on the backing assets would have been zero.

This position moved, quite materially in comparison, in the November 2025 consultation paper. There it was proposed that issuers would be permitted to hold up to 60% of the backing assets in short-term UK government debt securities, with a minimum of 40% to be held in an unremunerated account at the Bank.

As we put it in our briefing at the time: "is three-fifths of the business model viable?". It is fair to say that this consultation process has involved something of a negotiation about what the ratio should be, rather than a debate about whether this split should be imposed at all. The updated and final policy position reached in the Policy Statement is something of a tactical victory for the Bank. It is an internationally distinctive approach: overseas regimes are generally not forbidding the receipt of yield on a large slice of the backing assets pool.

The result has been an incremental shift from a 60%/40% ratio of gilts (with up to six months' residual maturity) to central bank deposits, to one of 70%/30%. In addition, overnight reverse repo transactions (using sterling-denominated UK government debt securities of six months or less maturity), which were previously going to be prohibited, will now be permitted. On the other hand, the Bank has been steadfast in refusing pleas to remunerate funds held on deposit with it, on the basis that stablecoin issuers are not conduits for the transmission of monetary policy. It has also refused to permit backing assets to be held in the form of commercial bank deposits (a striking divergence from the EU's MiCA, for example) or money market funds, because of its contagion, financial and operational risks fears.

We would emphasise that discussions about the risks of a run on an issuer often start by pointing out that there is no Financial Services Compensation Scheme (FSCS) protection for coinholders. While correct – and undoubtedly something that issuers will need to be very clear about to holders – that is why issuers must have rigorous audits and reconciliation, to ensure that liabilities to holders are always fully covered by backing assets and the financial risk reserve. It does not, in and of itself, dictate that a certain proportion of the backing assets should be prohibited from earning any yield.  

The challenge for systemic issuers is now a clear mathematical and economic question: do these numbers work? In addition, for issuers currently operating in other jurisdictions, is becoming a systemic GBP issuer in the UK worth it? Furthermore, while the Bank has signalled that it is working with the FCA to ensure that there is no instant cliff edge once an issuer is designated as systemic, we will need to wait to see the details of the Bank and FCA joint paper as to how an issuer will be required to change the composition of its backing assets from the FCA solo regime to that of the Bank-FCA joint regime.  

Many potential issuers continue to be aggrieved by the focus of both the Bank and the FCA on mandating direct redemption by holders with issuers; especially, when current market practice relies heavily on the secondary market (that is, holders with small holdings tend to sell their stablecoins to someone else, rather than redeem them directly with the issuer). The Bank's proposed policy was that redemption requests should be processed by the end of the day on which a valid request was made. Although the Bank continues to position this as its "expectation", it has acknowledged some of the sector's practical and regulatory concerns by clarifying that the backstop deadline is 24 hours from receipt, and that, more importantly, the 24 hours does not begin to run until an issuer has:

• received the redemption request;
• completed any AML/KYC checks that are needed; and
• received the stablecoins to be redeemed.

In a recurring theme, the Bank holds to its fundamental policy, but has updated the detail of its proposals sufficiently to resolve the major operational challenge for issuers (that said, we would suggest that issuers make sure that they do not have unreasonably slow AML/KYC processes).    

While the Bank will not permit the payment of yield that resembles interest to holders of systemic stablecoins (the source of furious debate in the US over the CLARITY Act), the Bank has given a helpful clarification that this does not apply to "benefits, incentives, rebates, discounts and other activity-based rewards that are consistent with the use of a stablecoin as a means of payment." The policy statement expressly accepts that banning what we are calling "payment-based rewards" would not be proportionate. As a result, a holder could receive bonuses or rewards that are based on, for example, transaction volume and value, but not a reward based purely on the length of time for which stablecoins are held.

This gives a number of firms confidence in how to structure aspects of their distribution channels.

Helpful and/or neutral clarifications have been made to other areas, including:

• a "step-up" approach for issuers that are systemic at launch (which will be permitted to hold 95% of their backing assets in short-term government debt securities for a period as they scale, with the ratio potentially changing in a phased way);
• expectations on direct access by issuers to payment systems;
• prudential requirements (covering capital and liquid assets for general business risks, the financial risk reserve and the wind-down reserve);
• safeguarding, excess asset and statutory trust arrangements (relating to the backing asset pool, the financial risk reserve pool and related proceed funds, on the one hand, and the wind-down reserve pool and related proceed funds on the other hand – including the permitted composition of the trust assets for each trust fund, the use of group third party custodians to hold trust assets and subject to HMT making the relevant legislative changes required to give the Bank enabling powers to impose statutory trusts);
• the proposed "backstop" Central Bank Liquidity Facility; and
• arrangements relating to issuer failure under the special administration regime for financial market infrastructure (including, a potential future consultation on whether additional requirements are needed to support operational and contractual continuity of the services of a systemic stablecoin issuer subject to the Special Administration Regime for financial market infrastructures).

Although, as we have indicated above, in none of these areas has the Bank fundamentally changed its earlier sign-posted positions. We have not, therefore, covered these matters in detail, but firms would be well-advised to think through how they will be implemented or used in practice, or are otherwise going to affect their business models.

"Multi-issuance" is the term given to the structure under which multiple different legal entities all jointly issue a stablecoin. As these entities could be in different jurisdictions and subject to different regimes, the aim of multi-issuance is to make the stablecoin fully fungible across borders. It has been a hot topic in the EU, although one major piece of collaboration between (what is now) 37 banks, Qivalis, has now been structured as a standalone joint venture authorised as an electronic money institution, so is not strictly "multi-issuance".

The Policy Statement clearly rejects multi-issuance, on the grounds that the Bank cannot be confident in the safety of a stablecoin where the backing assets and other compliance requirements are fragmented across borders.      

This comment is in the section addressing non-GBP stablecoins, but if it also applies to GBP stablecoins (and there is no immediate reason to doubt that), it could pose a genuine challenge for the adoption of GBP stablecoins globally, or at least, their utility outside the UK. Major jurisdictions, most notably the EU, but also the US, require the localisation of the backing assets (as, in fairness, does the UK for systemic stablecoins). Taken as a whole, requirements for local holding of backing assets combined with the Bank's opposition to multi-issuance reduces the chances of GBP stablecoins being widely used in (for example) the EU and US: in both cases, market entry essentially requires multi-issuance to be accepted in principle.

In this area, the "debate" remains somewhat circular. In summary: the Bank is open to the use of PPLs, as long as they meet its regulatory expectations on issues such as accountability, settlement finality (in the narrow sense of the point at which the system has operationally completed the transfer of a stablecoin), and operational resilience – but then goes onto say that it struggles to see how they can in practice meet those expectations. It is also questionable whether, and if so how, the use of PPLs is and can be made consistent with a number of the fundamental principles for financial market infrastructure tokenisation, including the requirement for a legally accountable person responsible for maintaining a clear record of ownership, as set out by the Bank and the FCA in their joint Call for Input on the Future of Tokenisation (see further below).

There will need to be much more discussion of this issue as not all ledgers are alike. We expect FCA guidance on the use of distributed ledger technology (DLT) by FCA-authorised firms very soon, and that is itself likely to spark a great deal of debate on the merits and drawbacks of PPLs to support funds, payments and tokenisation of other assets.

As we have indicated above, there is a considerable amount of work going on in this field at the moment. While much of the attention (and effort) has rightly focused on the new FCA regulatory regime (the authorisation gateway opens on 30 September, which is only a little over three months away), the PRA has made some interventions in May that are, philosophically, aligned to the dynamic revealed in the Bank's Policy Statement on sterling-denominated systemic stablecoins.

The PRA published a follow-up Dear CEO Letter on banking groups issuing stablecoins. The previous iteration of the letter had been interpreted as a "ban" on banks issuing stablecoins, demanding that these be issued from separate, insolvency-remote entities, with distinct branding and separate relevant regulatory permissions.

The PRA has now given some helpful clarification that when it referred to "branding", it did not mean that a banking group could not use its own name, for example. However, it appears resolute on the separate entity requirement, because of the financial stability risks it perceives from a PRA-authorised bank  both taking deposits and issuing stablecoins. In this context, there may be some flexibility, having regard to the public law requirements for proportionality to which the PRA is subject, where a bank issues a stablecoin that limits holdings to only wholesale customers.

That said, the major action point for banks interested in issuing stablecoins is that the PRA expects to be briefed on any such model. What is especially important is that the "separate branding" aspects would need to be fully designed and demonstrated to supervisors – this presumably even includes the customer journey within apps, if the intention is for a single app to be used for both bank accounts and stablecoin wallets.

The PRA also issued a follow-up Dear CEO Letter on the prudential treatment of cryptoasset exposures. This included a welcome acceptance that not all cryptoassets must be treated as akin to unbacked, volatile cryptocurrencies such as bitcoin. Full certainty on the prudential treatment is some time away, because the PRA must wait for the review being carried out by the BCBS. Once that is complete, the PRA expects its consultation on this to take place in 2028.

In an even broader context, we would urge firms that have not engaged with this CfI to do so – the deadline for responses is 3 July 2026.

It is quite plain that the FCA and Bank of England are supportive, in principle, of the wider adoption of tokenisation in the wholesale financial markets (or at the very least see that it is going to happen), and outline in the CfI a number of initiatives that are in train or planned. These include, most notably:

• the Digital Securities Sandbox;
• DIGIT, an on-chain UK government bond;
• the work of the Wholesale Digital Markets Champion, Christopher Woolard CBE;
• synchronised settlement within the Bank's RT2 system; and
• support of tokenised collateral within both CCPs and the Bank's Sterling Monetary Framework.

However, some of the themes in the Policy Statement on systemic sterling-denominated stablecoins also resound on the pages of the CfI – and  are likely to reflect the foundational positions and concerns of the Bank, specifically.  Three questions occur to us reading the Policy Statement and the CfI together:

• What is the role going to be for settlement in stablecoins within wholesale markets? Both say that there is some role; neither is sufficiently clear about what that looks like.
• How do issuers get comfortable with using PPLs? As mentioned above, this conversation will be ongoing for some time. The continuing proliferation of new blockchains also makes this a moving target.
• Is there a role for stablecoins as collateral? The CfI's intention is clearly that "tokenised equivalents" of an asset that is acceptable collateral (under any particular regulatory or other relevant regime) should be acceptable as long as the attendant risks are the same – so tokenised units in a money market fund should be seen as no different to a non-tokenised unit in such a fund. On this basis, stablecoin issuers would prefer that stablecoins be regarded as tokenised cash. This is itself a significant topic, and one that touches on potential and pressing needs for legislative reform, most obviously to the Financial Collateral Arrangements (No. 2) Regulations 2003 and the Financial Markets and Insolvency (Settlement Finality) Regulations 1999. HMT already has the power to reform these (and other relevant) legislative regimes under the Financial Services and Markets Act 2023, and perhaps the introduction of the draft Financial Services and Markets Bill 2026 will prompt some urgent and much-needed developments.

The single key message is to engage with policymakers, regulators and supervisors – take them at their word when they request this.

More immediately, on systemic stablecoins there is a specific ask to check that the draft CoP delivers the policy objectives, as well as responding to new and clarified policies, and the deadline for this is 22 September 2026. That window for influence will close quickly, as the Bank intends to publish the final CoP for entry into force by the end of 2026. This gives the Bank relatively little time to amend the CoP in a meaningful way, so engagement is better sooner rather than later.

Speaking of September, on 16 September 2026, Travers Smith hosts its annual Future of Fintech conference, at which this will no doubt feature prominently. Contact any of the Fintech, Market Infrastructure & Payments practice group to request access to that event, or to discuss any of the issues outlined in this article.