Briefing
The Bank of England (BoE) has substantially revised its prudential framework for systemic sterling-denominated stablecoins, moving from an initial stringent proposal to a more flexible model that aligns with international standards. This action immediately alters the operational mandate for UK-based stablecoin issuers by relaxing the requirement for backing assets to be held exclusively as central bank deposits, thereby creating a clearer path for liquidity management and market entry. The revised policy now mandates that a minimum of 40% of backing assets must be held as unremunerated deposits at the Bank of England, with the remainder permitted in short-term UK government debt.
Context
Prior to this modification, the prevailing regulatory uncertainty centered on the BoE’s initial, highly restrictive proposal, which suggested that systemic stablecoins should be backed entirely by central bank reserves to eliminate credit and liquidity risk. This initial stance presented a significant compliance challenge, as it was viewed by the industry as economically unviable and an impediment to innovation, effectively limiting the ability of issuers to generate revenue from reserve assets and creating a divergence from emerging global frameworks. The industry’s feedback highlighted the need for a balanced approach to prudential standards.
Analysis
The shift in backing asset composition directly impacts a firm’s treasury and risk management systems, requiring an immediate update to liquidity and capital models. Issuers must now architect a dual-asset reserve structure, balancing the safety of the mandated 40% central bank deposit with the yield and risk profile of up to 60% in short-term UK government debt securities. Furthermore, the introduction of transitional holding limits (£20,000 for individuals) necessitates the development of new, granular compliance controls within KYC/AML systems to monitor and enforce per-coin balances at the consumer level. This operational requirement ensures that the stablecoin is primarily used as a payment instrument rather than a large-scale investment vehicle.
Parameters
- Minimum Central Bank Deposit ∞ 40% of backing assets must be held as unremunerated deposits at the Bank of England.
- Individual Holding Limit ∞ £20,000 transitional limit for individual coinholders across any single systemic stablecoin.
- Consultation Deadline ∞ February 10, 2026, the date by which industry feedback must be submitted to the Bank of England.
- Maximum Debt Allocation ∞ Up to 60% of backing assets can be held in short-term sterling-denominated UK government debt securities.
Outlook
The next phase involves the industry’s response to the consultation, which closes on February 10, 2026, followed by the BoE’s finalization of rules and Codes of Practice expected in the second half of 2026. This modified framework sets a significant precedent by formalizing a dual-asset reserve model that provides a template for other jurisdictions seeking to balance financial stability with commercial viability. Potential second-order effects include increased institutional interest in the UK stablecoin market and a strategic focus by issuers on integrating payment efficiency features, given the prohibition on paying interest to coinholders.
Verdict
The Bank of England’s pragmatic adjustment to systemic stablecoin reserve requirements provides essential regulatory clarity, strategically positioning the UK as a viable hub for digital currency innovation and institutional adoption.
