Briefing
The Bank of England (BoE) has published its refined proposal for regulating sterling-denominated systemic stablecoins, establishing stringent, prescriptive rules for reserve asset composition. This action directly addresses financial stability concerns by ensuring stablecoin issuers maintain robust liquidity and a clear path to par redemption, thereby integrating these digital assets into the core financial system with bank-grade controls. The most critical compliance parameter is the mandate that at least 40% of backing assets must be held as central bank deposits , with the remaining portion permitted in short-term UK government debt securities.
Context
The pre-existing UK regulatory approach to digital assets was fragmented, relying on piecemeal anti-money laundering (AML) rules and consumer warnings, lacking a comprehensive framework for market-wide stability. The Financial Services and Markets Act (FSMA) 2023 granted the BoE the authority to regulate systemic digital settlement assets (DSAs), but the precise prudential standards remained an open question. Initial proposals were criticized by the industry for being too restrictive and incompatible with stablecoin revenue models, creating a legal uncertainty regarding the operational viability of a sterling stablecoin ecosystem. This new consultation paper provides the necessary legal precision for a dedicated prudential regime.
Analysis
This policy shift necessitates a fundamental re-architecture of operational and treasury systems for all prospective systemic sterling stablecoin issuers. The 40% central bank deposit requirement dictates a high-liquidity, zero-risk asset structure for a significant portion of the reserves, directly impacting yield generation models. Firms must establish new legal and operational custody arrangements with the Bank of England, integrating real-time reserve attestation and reporting modules into their compliance frameworks. This prescriptive approach elevates the regulatory burden, creating a higher barrier to entry that prioritizes systemic stability over potential short-term profitability for issuers, aligning the UK framework with the highest global prudential standards.
Parameters
- Central Bank Deposit Requirement → 40% minimum of backing assets must be held as central bank deposits.
- Permitted Debt Securities Cap → Up to 60% of backing assets can be held in short-term sterling-denominated UK government debt securities.
- Consultation Deadline → February 10, 2026, marks the end of the feedback period for the proposed regime.
- Systemic Designation Authority → HM Treasury (HMT) is responsible for formally recognizing a stablecoin as systemic.
Outlook
The BoE’s modified proposal, while still robust, represents a strategic compromise, demonstrating a willingness to adapt policy based on industry feedback to foster innovation. The next phase involves industry engagement during the consultation period, concluding in February 2026, which will determine the final shape of the prudential sourcebook. This framework is poised to set a global precedent for how major central banks regulate digital currency reserves, potentially influencing other jurisdictions, and providing a clear, regulated path for stablecoins to be utilized in UK wholesale financial market settlement via mechanisms like the Digital Securities Sandbox.
