Bank of England Proposes Strict Sterling Stablecoin Reserve and Holding Limits → Regulation

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Briefing

The Bank of England has launched a pivotal consultation on its proposed regulatory framework for sterling-denominated systemic stablecoins, establishing a comprehensive prudential regime to manage financial stability risk during the transition to digital money. This action mandates a precise reserve composition and introduces temporary holding limits, fundamentally altering the operational model for systemic issuers and setting a high bar for market entry. The core requirement stipulates that systemic stablecoin issuers must back 40% of their liabilities with unremunerated accounts at the Bank of England, with the remaining 60% permitted in short-term UK government debt.

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Context

The prevailing regulatory environment for stablecoins in the UK has been characterized by a lack of dedicated prudential standards for systemically important payment instruments, relying instead on a patchwork of existing financial services and e-money regulations. This ambiguity presented a significant compliance challenge, as firms lacked clarity on the necessary capital, liquidity, and governance controls required to operate a large-scale, fiat-pegged digital currency without triggering undue systemic risk to the UK’s bank-based mortgage and credit provision system.

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Analysis

This consultation directly impacts the financial architecture and operational controls of all prospective systemic sterling stablecoin issuers. The explicit reserve composition rule → mandating a 40% central bank deposit → alters the product structuring by removing the potential for yield on a substantial portion of the backing assets, thereby recalibrating the business model’s profitability profile. Furthermore, the temporary holding limits of £20,000 for individuals and £10 million for most businesses necessitate the immediate integration of new, granular KYC/AML controls and transactional monitoring systems to enforce the caps at the user level, adding a critical layer of operational complexity to the compliance framework.

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Parameters

Individual Holding Cap → £20,000 (Temporary maximum for retail stablecoin holdings)
Reserve Backing Minimum → 40% (Minimum proportion of liabilities to be held in unremunerated BoE accounts)
Government Debt Maximum → 60% (Maximum proportion of liabilities permitted in short-term UK government debt)
Business Holding Cap → £10 Million (Temporary maximum for most business stablecoin holdings)
Consultation Deadline → February 10, 2026 (Final date for industry feedback on the proposed rules)

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Outlook

The next phase involves the industry’s response to the consultation, which will critically determine the final calibration of the reserve and holding requirements before the anticipated 2026 implementation. This prudential framework sets a robust precedent, signaling the UK’s commitment to integrating digital money into its financial system with a focus on stability over speed. The rules could create a competitive advantage for UK-based issuers by providing regulatory legitimacy, simultaneously influencing other major jurisdictions like the US and EU as they finalize their own systemic stablecoin regimes.

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Verdict

The Bank of England’s systemic stablecoin proposal establishes an uncompromised prudential foundation, ensuring that UK digital money innovation is built on central bank stability and sovereign debt integrity.

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