Out on a limit: The Bank of England's systemic stablecoins consultation provokes and pleases in equal measure

The most fundamental shift made by the Bank is on composition of backing assets. Previously, the position was unequivocal: systemic stablecoins would have to be 100% backed by unremunerated reserves held with the Bank. To put it another, deliberately provocative way, all extant business models would, in the case of systemic stablecoins, be essentially banned (it is well-documented that Tether and Circle, the major stablecoin issuers in the world today, derive most of their income from the yield on their backing assets). 

The new proposal, informed by that feedback, is for issuers to be able to hold up to 60% of the backing assets in short-term sterling-denominated UK government debt, with the other 40% (as a minimum) being held in Bank reserves. Such reserves will remain unremunerated, because, as the Bank explains, the purpose of remunerating reserve accounts is the transmission of monetary policy, which will not be relevant to systemic stablecoins as payment instruments.

This structure is regarded by the Bank as providing the requisite liquidity to enable redemption requests. This is relevant because, in alignment with the FCA, but still likely to disappoint potential issuers, systemic stablecoins will be subject to a requirement to be directly redeemable at par by coinholders. In effect, the Bank's policy stance on redemption then drives its approach to the liquidity needed for the backing assets.

Backing assets will be required to be held under a new statutory trust, to be imposed on terms by the Bank under a new rule-making power to be provided by legislation. As with the FCA's equivalent proposals, this is not uncontroversial, although the issues are not completely identical given the Bank's requirement that the backing assets be located in the UK (see section 6 below). In our view, the key requirement is the outcome: that the backing assets are protected in the event of insolvency and available to meet the claims of coinholders, rather than "a statutory trust" per se, as we argued in an earlier article on the FCA's consultations.   

Three other elements are helpful. First, issuers that are "systemic at launch" will have access to a "step-up" regime, in which, initially, they will be allowed to hold up to 95% of their backing assets in sterling-denominated UK government debt securities (the relevant section of the consultation does not refer to short-dated maturities, but this may be a simple oversight as it attracts no comment). This "allowance" would be reduced, probably in stages, on a case-by-case basis as the issuer scales. The Bank has also indicated that stablecoin issuers transitioning from the FCA's non-systemic regime can be expected to follow a similar path over an appropriate time-scale to ensure an orderly transition.

Second, there would be a provision to allow temporary deviations from the 40:60 ratio in order to meet unexpected and large redemption requests. 

Third, the Bank is considering establishing a backstop lending facility for issuers, and also states that issuers will be permitted to "monetise securities via repurchase agreements to generate liquidity" (although systemic stablecoin issuers will not be permitted to buy or borrow securities).

Also in alignment with the FCA's proposals for non-systemic stablecoins, the Bank has confirmed its position that systemic stablecoin issuers should not pay interest or any other remuneration to coinholders – although, surprisingly, it indicated that it received only a limited number of responses to this point as part of its earlier discussion exercise. The Bank is still considering its approach to the practice of offering incentives for using systemic stablecoins (such as rewards or points, linked to transaction volumes). 

Taken in the round, these proposals are a welcome recognition that the Bank's previous stance would render many business models unviable, but serious questions remain as to whether the revised proposals go far enough. Chiefly, and putting it bluntly: "is three-fifths of the business model viable?" There is also no room found in the Bank's proposals for interest-bearing, instant access commercial bank deposits (and in fact the very idea of using some, even as a "float" for redemptions, is implicitly regarded as a bad idea) – even though, arguably, allowing such deposits might be considered to ameliorate some of the concerns on bank deposit outflows, on which the proposals for holding limits are founded.   

Although the Bank makes clear in several places that it intends the transition from FCA regulation to the Bank's regime to be "smooth"; on any view, this is going to be disruptive both commercially and operationally. The Bank also states, in the context of backing assets, that it expects issuers to have direct access to payment systems. While this may seem a natural corollary of holding reserves at the Bank, and is also logical in the context of maximising interoperability (on which see further below), it does impose an additional (and not entirely straightforward) step to be taken in this transition (unless issuers become direct participants in payment systems at an earlier stage). The Bank is a key gatekeeper here, as the operator of RTGS and provider of reserves accounts, so (while this is not said), we hope that the Bank would look favourably, in principle, on access for systemic issuers.     

On prudential requirements, the Bank has accepted feedback that there is no need for a separate "operational risk buffer", as originally proposed, to be held as part of the shortfall reserve. This would have been an amount of financial resources set aside, and held on statutory trust for coinholders and insolvency practitioners, to cover any shortfalls in backing assets that were the result of an operational risk crystallising.

Instead, this will – in line with Principle 15 of the Principles for Financial Market Infrastructures ("PFMIs") – be mitigated by capital held for general business risk. Capital (consisting of paid-up equity capital, share premium, retained earnings and disclosed reserves largely in line with Common Equity Tier I capital) is proposed to be set as the higher of:

• The cost of recovery from the largest plausible loss event; or

• Six months of current operating expenses.

Assets funded by capital will be required to be high-quality and liquid in line with the guidance provided by CPMI-IOSCO to Principle 15. Such general business risk capital standards will apply not only to a relevant payment system operator issuing systemic stablecoins, but also a relevant specified service provider (as a result of the Bank's use of the umbrella concept of a "systemic stablecoin issuer" to cover both). This is a novel extension of the philosophy and rationale behind PFMI 15, which is generally limited in its application to "FMIs" only. This might suggest a slightly concerning development for specified service providers with reference to the Bank's new Fundamental Rule 4 ("An RPSO or SSP must maintain sufficient financial resources"), which is due to come into effect on 18 July 2026, notwithstanding the Bank's assurances (in its Supervisory Statement published on 18 July 2025) that: "it does not impose an additional requirement for any FMI beyond that which is already required by applicable rules, legislation and expectations that have been communicated to FMIs by the Bank" and that "for RPSOs and SSPs, the intention of this rule is to formalise the expectations already established through the PFMIs and during the course of supervisory engagements". 

Separately, a systemic stablecoin issuer will also be required to hold on statutory trust two reserves of liquid assets, which can be deducted from capital (to avoid duplication among risks captured):

• A "financial risk reserve" to top-up shortfalls in backing assets due to the market risk of holding short-term UK sovereign debt securities.

• An "insolvency/wind-down reserve", covering the cost of appointing an insolvency office-holder to the issuer, continuing critical services during the wind-down period and returning or transferring funds to coinholders. Liquid assets held in the insolvency/winddown reserve might have slightly higher maturity profiles to those held in the financial risk reserve.

Further, the Bank is proposing to permit a systemic stablecoin issuer to retain the income or other gains (e.g. on realisation) on the reserve assets (subject to the fiduciary obligations of the issuer as a statutory trustee) – but such income or gains will not be capable of being passed on to coinholders.

This is yet another area where issuers will need to grapple with the move from the FCA regime – based on the Investment Firms Prudential Regime – to the Bank's PFMI-derived approach. While capital requirements will therefore differ between issuers, in practice the Bank's financial stability objectives will mean an exacting level of scrutiny where systemic stablecoins are concerned, further compounding the worries issuers already have about the FCA regime. That said, conceptually, at least, the Bank's regime is simpler to understand for firms new to prudential regulation.

The Bank reported that many respondents to its discussion paper wanted more clarity on when an issuer would be of "systemic importance". This is, technically, a statutory test for HMT (set out below), as imposed to one the Bank designs itself, but, as the Bank will be in a position to recommend designation as systemic to HMT, the Bank has given some extra colour as to the way it approaches this exercise.

This includes giving three examples of different models at different stages, and setting out the Bank's view and reasoning. Unfortunately, the examples are all very obvious (particularly to those already familiar with their use in the systemic FMI context) and add little to help predict their application for novel business models. It is not necessarily easy to map the approach to systemic payment systems directly onto stablecoin issuers (although issuers of digital settlement assets can fall within the definition of a "DSA service provider" in section 182(5A) of the Banking Act 2009).

In many ways the single most important element to take away from this section is a crystallisation of what Andrew Bailey and others have alluded to at various points – use in the cryptoasset markets does not count as systemic; what the Bank cares about in this context is their use in core payment markets, which could of course include the B2B context. 

In a move of more limited utility, the Bank stresses that it is not inherently opposed to the use, for issuing, holding and settling systemic stablecoins, of public permissionless ledgers (i.e. those with no central 'operator' and where, in theory at least, anyone can use the blockchain).

It does note, however, that it sees real difficulties in achieving the right outcomes on governance (i.e. accountability), settlement finality, and operational resilience in the context of such ledgers. This is entirely logical, but does rather have the effect of throwing the challenge back onto the industry. In effect, public permissionless ledgers can be used, the Bank says, as long as an issuer or system can overcome all of the inherent challenges that come with using such ledgers.  

Readers will recall that HMT has taken a policy decision to permit (subject to certain guardrails) overseas issuers of stablecoins to offer their stablecoins in and to the UK. We have written before that, while very welcome to the ecosystem and to users of stablecoins, this does risk driving activity offshore (and therefore outside the FCA's remit).

The Bank has, for systemic issuers of sterling-denominated stablecoins, cut across this in one sense. Those issuers will, in any case, be required to establish a subsidiary in the UK to house the business caught by these proposals, and the backing assets and reserves will need to be held in the UK. This will enable adequate oversight as well as protecting coinholders' claims to the backing assets in the event of failure.

This is interesting as it potentially inverts the incentives to move offshore that we mention above – for sterling-denominated issuers intending to be systemic, or whose business models might lead to them becoming systemic, they may be better off establishing in the UK from the outset after all. In effect, the choice becomes one between a transition from the FCA regime to the Bank's regime, versus a transition from an overseas regime, plus the work needed to establish the UK subsidiary (which could be significant, especially if it involved repatriation of assets held globally).  

The Bank raises three "new areas" (its phrase):

• Interoperability

• Approaches to innovation in wholesale markets

• Cross-border arrangements

While all three are clearly important (and the Bank has been emphasising the criticality of interoperability (with which we agree) at least as far back as Sarah Breeden's speech touching on "walled gardens" in April 2024), few if any concrete proposals are made.

The most interesting of the three is the Bank's discussion on cross-border arrangements, by which it means its approach to non-sterling-denominated stablecoins that could be systemic in the UK. As has been discussed very widely, the overwhelming majority of stablecoins in issue today are USD-denominated, and the approach taken in the US is an explicit attempt to drive even greater use of the dollar as the world's reserve currency. Is it entirely feasible that USD-denominated stablecoins could have financial stability impacts in the UK (particularly, we note, if the sterling-denominated stablecoin sector is stifled by regulation).

The Bank cautiously discusses an approach which would see it defer to the issuer's home state regulator, setting out that it would examine the home state regime's regulatory requirements; risk mitigation measures; supervisory approach; failure arrangements; and co-operation arrangements. It also notes that deference could facilitate their use across borders. Although it is not stated, this is also consistent with the mission given to the grandly-named Transatlantic Taskforce for Markets of the Future, which is required to report by late March 2026 on (among other points) "options for short-to-medium term collaboration on digital assets" between the US and UK. The GENIUS Act includes a power for the US Treasury Secretary to put in place reciprocal recognition regimes with other jurisdictions (section 18(d)).

The Bank does then conclude that deference "is only possible where it does not put UK financial stability at risk". In that case "alternative measures" would be needed – but there is no suggestion of what these would entail.

There is a very long way to go – those who expected this consultation to provide all the answers will be sorely disappointed (and indeed the list of new and unanswered questions may have even got longer).

Responses to this paper are due by 10 February 2026 – and we hope that it will not be another two years until the next stage. In any event, the Bank signals a number of future publications (which we expect to be rolled up together):

• Draft Codes of Practice – these will be the detailed rules with which issuers must comply.

• A next phase of the consultation, to include further guidance on the possible exceptions to the split in backing assets between Bank reserves and gilts, and detailed design of the regime for safeguarding backing assets.

• A joint paper with the FCA covering how the two regimes interlock, and especially how the transition from one to the other will work.

• A specific supervisory approach to systemic stablecoins.

Travers Smith can assist with your responses to this consultation, and engagement with the future phases outlined above. As the Bank has adopted a very "FMI-oriented" approach to this regime, we expect to draw on our decades of experience in designing, establishing and supporting FMIs in the UK and beyond.