Proposed regulatory regime for sterling-denominated systemic stablecoins - Bank of England

I look forward to hearing your views on the proposals set out in this consultation paper to deliver a future payments ecosystem that is trusted, resilient, and fit for the digital age.

Payments are networks – the more people use them, the more powerful they become. We are therefore keen to work closely with stakeholders to deliver interoperability between systemic stablecoins, traditional and tokenised bank deposits, and central bank money. We will take this forward through the Bank’s chairing of the new Retail Payments Infrastructure Board, which is designing the UK’s next generation retail payments infrastructure. We will also explore the roles stablecoins could play in wholesale financial markets via the Digital Securities Sandbox.

Our regime is designed to maintain financial stability and enable systemic stablecoin issuers to operate viable business models. Alongside granting such issuers access to a deposit account at the Bank, we are proposing that they can hold a portion of their backing assets in short-term UK government debt. We are also considering putting in place central bank liquidity arrangements to help backstop issuers’ ability to monetise those assets if needed.

Since publishing our discussion paper on our regime in 2023, we have engaged extensively with industry and other stakeholders. We have listened carefully to and are grateful for the feedback received, which has shaped the proposals we are consulting on today. Following this consultation, we will consider the feedback received before consulting on and finalising our rules in 2026.

Our approach is necessarily forward-looking: we know from other areas of technological innovation that retrofitting regulations once real-world applications have emerged at scale is unlikely to succeed. Instead, we are setting out clear standards to ensure that systemic stablecoins purporting to be money deliver stability of nominal value, robust legal claim, and the ability always to redeem at par in fiat currency.

With that comes great opportunities. We are designing a regulatory regime for stablecoins that is fit for the future. Our focus is on possible future use in real world payments and settlements, not their current use to buy and sell cryptoassets. Use of regulated stablecoins could lead to faster, cheaper retail and wholesale payments, with greater functionality, both at home and across borders. We want to support such a role for stablecoins as part of a ‘multi-money’ system alongside commercial bank money (including tokenised bank deposits), all underpinned by the continued role of central bank money at the heart of the financial system.

The Bank of England’s core mission is to promote the good of the people of the UK by maintaining monetary and financial stability. Trust in money is a critical part of that mission, and it has never been more relevant than now. As innovation in money and payments accelerates, including through the growth of stablecoins, it is our job to ensure that the public can have the same trust in new forms of money as they do in existing ones.

The PSR’s regulatory powers are over participants in systemic payment systems (including those enabling the transfer of DSA) designated by HMT. It is responsible for promoting competition, innovation, and end user interests in payment systems. The FCA will take on these responsibilities once the PSR’s functions have been consolidated into it.

When in force, this will allow the FCA to set rules for UK-issued stablecoins to protect consumers, promote effective competition, and protect and enhance the integrity of the UK financial system, including where UK-issued stablecoins are used for activities other than payments. Stablecoins that are also recognised as systemic by HMT will be subject to the Bank’s proposed regime for systemic stablecoins set out in this consultation paper and jointly regulated by the FCA for conduct, consumer protection and competition.

HMT also has powers under FSMA to expand the regulatory perimeter for stablecoins and cryptoassets more broadly. In April 2025, HMT consulted on the creation of new regulated activities in relation to stablecoins and cryptoassets and proposed creating a specified activity of issuing a ‘qualifying’ stablecoin in the UK which would require the issuer to be authorised by the FCA. HMT is currently finalising the scope of the proposed instrument and associated amendments to other legislation such as existing anti-money laundering and financial promotions requirements for cryptoasset firms.

The Bank’s approach to how we would assess systemic importance, based on the statutory recognition criteria, is set out in Section 2.3.1 of this consultation paper.

A service provider, which includes stablecoin issuers, may be brought into the Bank’s remit by HMT because it is an operator of a systemic payment system, it is a systemic service provider, or because it provides essential services to a systemic payment system or to a systemic service provider (for example, the service provider provides essential custodial wallet services to a systemic payment system).

HMT is required to consult the Bank (as well as the FCA and Payment Systems Regulator (PSR) where relevant) as part of the recognition process. The Bank will provide technical advice to HMT regarding the systemic importance of payment systems and service providers using stablecoins. The Bank may also recommend to HMT that a payment system or service provider be prospectively recognised as systemic if they are not operating at systemic scale at present but are likely to do so in the future – this could be recognised as ‘systemic at launch’.

When recognising a payment system or service provider as systemically important, HMT must be satisfied that any deficiencies in the design of the system or services, or any disruption to the operation of the system or the provision of those services, would be likely – (1) to threaten the stability of, or confidence in, the UK financial system, or (2) to have serious consequences for business or other interests throughout the UK.

Table A above provides an illustration of how stablecoin issuers in the UK could be regulated according to different types of use case across retail and wholesale financial markets.

Once recognised by HMT, these entities will be subject to the Bank’s powers under the Banking Act 2009 (the Act). These include the power to obtain information, to issue principles and Codes of Practice, to require the establishment of system and service provider rules, and to make directions. The Bank also has powers of enforcement over systemic stablecoin issuers that fail to comply with the Bank’s regulatory requirements.

HMT is responsible for deciding which payment systems using stablecoins and service providers are recognised as systemically important and would therefore fall within the Bank’s remit, and be subject to the regime proposed here.

As set out in Box A below, HMT may recognise a payment system or a service provider. Within this document, we use the term ‘ systemic stablecoin issuer ’ to refer collectively to a recognised payment system or service provider issuing the stablecoin.

This consultation paper sets out how the Bank intends to regulate sterling-denominated systemic stablecoins. Our proposed approach intends to ensure that we harness the potential benefits that systemic stablecoins could bring to payments in the UK, while ensuring that innovation happens responsibly.

The Financial Services and Markets Act (FSMA) 2023 expanded the Bank’s regulatory remit to cover digital settlement assets (DSA), including systemic stablecoins. Systemic stablecoins – those that are widely used in payments and therefore may pose risks to UK financial stability – will be regulated by the Bank and the Financial Conduct Authority (FCA), once recognised by HM Treasury (HMT).

Stablecoins have the potential to make payments faster, cheaper and more efficient and could be used widely for payments in the UK.

This consultation paper sets out the Bank’s policy positions for a proposed regulatory regime for sterling-denominated systemic stablecoins for UK payments, issued by non-banks.

The consultation paper is part of the broader policy development process for the UK’s stablecoin framework, complementing the ongoing initiatives by HMT and the FCA. It is not intended to provide detailed implementation requirements at this stage. Instead, it clarifies the Bank’s proposed policy positions and lays the groundwork for the next phase of our work, which will culminate in Codes of Practice setting out the specific rules and expectations for systemic stablecoins. We plan to consult on and finalise the draft Codes of Practice next year (Figure 1).

This phased approach is designed to support ongoing stakeholder engagement and refinement, helping ensure the regime remains proportionate, risk-based, and practical to implement.

Figure 1: Timeline of the Bank’s stablecoin-related publications

We also set out our current thinking on the use of sterling-denominated stablecoins as a settlement asset in wholesale financial markets, and our approach to non-sterling denominated stablecoins that could become systemic in the UK in Sections 2.5.2 and 2.5.3, respectively.

2.1: Overview of industry feedback and our response

We received 46 responses to our 2023 discussion paper on our proposed regime for systemic stablecoins from a broad range of stakeholders (Appendix 1). These included banks, non-bank payment service providers, payment system operators, trade associations, academia, and individuals. Their feedback, alongside insights from our industry engagement sessions, has been central to informing the proposals in this consultation paper.

Respondents broadly welcomed the discussion paper and appreciated the opportunity to engage with the Bank on the future regulatory framework for systemic stablecoins. They supported the initiative from the Bank to provide clarity and certainty to support responsible innovation in payments. Many respondents emphasised the importance of ensuring interoperability between public and private forms of money to preserve trust in the monetary system.

Respondents raised some concerns. Many noted that our initial proposal for backing assets to be held entirely in unremunerated central bank deposits would not support a viable business model and was inconsistent with the prevailing business models of stablecoin issuers. Some respondents highlighted a potential trade-off between innovation and financial stability in relation to holding limits. Others noted transition risks when moving from the FCA’s non-systemic regime to the Bank’s systemic regime, which could create regulatory uncertainty. Some respondents expressed concern that divergence between the UK regime and those in other jurisdictions could pose challenges for cross-border operations and establishing operations in the UK.

We are grateful for this feedback. It has informed our revised proposals and, where appropriate, we have provided further clarity to address the issues raised.

Figure 2: Overview of the Bank’s proposed policy approach compared to the 2023 discussion paper

Proposed approach in the 2023 discussion paper Backing assets restricted to central bank deposits only. These deposits would not be remunerated. Industry feedback Inconsistent with other comparable jurisdictions.

Incompatible with stablecoin revenue models.

Uneven playing field with other financial service providers.

Risks when transitioning between FCA and Bank requirements. Proposed approach in this consultation paper At least 40% of backing assets to be held as deposits at the Bank (central bank deposits). These can be used to meet redemption requests in normal and stress conditions. The central bank deposits will be unremunerated in line with the principle that systemic stablecoins should be primarily used for payments and issuers are expected to play a very limited role in the transmission of monetary policy, which is the primary rationale for remunerating central bank reserves held by commercial banks.

which is the primary rationale for remunerating central bank reserves held by commercial banks. Up to 60% of backing assets to be held in short-term sterling-denominated UK government debt securities, consistent with emerging regulatory regimes internationally.

Consistent with the expectation that central bank deposits are used to meet redemption requests, temporary deviations from the 40:60 split may be permitted for systemic stablecoin issuers to meet large unanticipated redemption requests.

Systemic stablecoin issuers are permitted to lend securities via repurchase agreements to generate liquidity. Borrowing securities via repurchase agreements is not permitted.

The Bank is considering providing access to a backstop lending facility for eligible, solvent, and viable systemic stablecoin issuers.

Step-up regime: Stablecoin issuers recognised by HMT as systemic at launch – those that are considered as systemically important from the outset of their operations – could be allowed to hold up to 95% of their backing assets in sterling-denominated UK government debt securities as they scale. The percentage would be reduced to 60% once the stablecoin reaches a scale where this is appropriate to mitigate the risks posed by the stablecoin’s systemic importance without impeding the firm’s viability. We would expect stablecoin issuers transitioning from the FCA’s non-systemic regime to follow a similar path over an appropriate time horizon to ensure that transition is orderly. Questions Q1: Do you have views on our proposal to allow systemic stablecoin issuers to hold up to 60% of backing assets in short-term sterling-denominated UK sovereign debt securities alongside unremunerated deposits at the Bank, as an appropriate balance between business model viability and mitigation of financial stability risks?

Q2: Do you have comments on the step-up regime as a way of supporting innovation while mitigating financial stability risks?

In the discussion paper, we proposed that systemic stablecoin issuers back their liabilities (coins in issuance) with 100% deposits held at the Bank, which would not be remunerated. While most of the respondents agreed with the assessment of the role the backing assets play in the stability of value, most respondents disagreed strongly with the proposal. They highlighted that the proposal would:

Present challenges for stablecoin issuers whose revenues are mainly derived from backing assets, to set up a commercially viable business model in the UK. It may also predominantly benefit firms that are large from the start and can leverage network effects, ie generate revenue through data or processing fees. As a result, this could constrain innovation and limit exploration of new use cases.

Create an uneven playing field between systemic stablecoin issuers and other financial institutions. For example, non-systemic UK stablecoin issuers are permitted to hold remunerated assets under the proposed FCA regime. The difference between the Bank’s systemic regime and the FCA’s non-systemic regime could create transition challenges and pose significant transition risks.

Diverge from other comparable jurisdictions. The proposed backing model was arguably stricter compared to other jurisdictions, which could limit the possibility for issuers to establish, operate, innovate, and scale in the UK market given the cross-border nature of digital assets.

We have considered this feedback carefully and made substantial changes to our proposals on backing assets.

We propose to allow systemic stablecoin issuers to receive a return on a proportion of their backing assets. Systemic stablecoin issuers would be allowed to hold up to 60% of their backing assets in short-term sterling-denominated UK government debt. At least 40% would need to be held as unremunerated deposits at the Bank.

Our proposal aims to ensure that systemic stablecoin issuers have enough liquid assets to meet unanticipated and rapid redemptions requests. We believe this can be achieved via central bank deposits, which provide an issuer with immediate access to funds if coinholders seek to redeem large volumes of stablecoins in a short period of time. Without this, systemic stablecoin issuers may struggle to meet redemption requests promptly, leading to a loss of trust and confidence in the stablecoin, including the risk that the value of the stablecoin falls below par. The proposed threshold of at least 40% unremunerated deposits held at the Bank aligns with our estimates of possible short-term redemption requests. These estimates are based on outflow rates that have occurred during stress events in traditional and cryptoasset markets.

We considered whether the proportion of sterling-denominated UK government debt securities in backing assets could be higher than 60% to further support innovation in the UK and business model viability. We concluded that a higher percentage for a systemic stablecoin could affect trust and confidence in money by increasing the chances that issuers may not have sufficient liquidity to meet rapid withdrawals. We considered this threshold appropriate in the current context of the UK financial system and had regard of the size of the UK short-term government bond market.

We also considered a lower percentage of sterling-denominated UK government debt securities but concluded that while this was more likely to support confidence and trust in money, it would not provide sufficient support for innovation in the UK.

Consistent with emerging regimes internationally, we are proposing to restrict holdings of sterling-denominated UK government debt to short-term maturities only.

We believe that restricting holdings of sterling-denominated UK government debt to short-term maturities only will minimise market risk – the risk that the market value of backing assets falls below the value of coins in issuance – as market prices of short maturity debt are more stable than those with a longer maturity. Lower market risk means that issuers can put aside lower shortfall reserves (Section 2.2.2: Capital and reserve requirements).

The risks to the Bank are also reduced if the Bank lends to systemic stablecoin issuers against collateral with a more stable value, through the backstop lending facility being considered by the Bank. Short-dated debt holdings with regular maturities would support issuers’ liquidity management by allowing them to replenish deposits held at the Bank if required. We propose to allow systemic stablecoin issuers to monetise securities via repurchase agreements to generate liquidity. The short maturity would make it easier for issuers to monetise backing assets in private markets through outright sales or repurchase agreements to meet redemption requests. We do not propose allowing issuers to buy securities via repurchase agreements.

While there are benefits to restricting UK sovereign debt holdings to short maturities, we recognise that the current size, structure and purpose of that segment of the UK sovereign debt market may not support large demand and activity by systemic stablecoin issuers. Secondary market activity in UK Treasury Bills and short-term gilts is currently low, as these are typically buy-to-hold securities for liquidity management purposes and may therefore not support issuers selling outright or through repurchase agreements in private markets to a sufficient extent.

This consultation paper seeks feedback on required backing assets for systemic stablecoins. The Bank makes no assumption or suggestion as regards the future supply of a particular qualifying asset, although we recognise that such questions will be relevant as and when systemic stablecoins develop in the UK. The UK authorities need to consider carefully the consequences of this proposal on short-term UK sovereign debt markets as a result of increased demand and activity by systemic stablecoin issuers. The Bank would look to specify the maximum maturity of eligible assets in the draft Codes of Practice to be published next year.

The proposed approach creates a framework that supports innovation by supporting business model viability and ensures closer alignment between the Bank and FCA regimes and with those of other comparable jurisdictions. The combined requirements of central bank deposits and short-dated government debt ensure that issuers hold sufficient liquid assets to meet redemption requests under both normal and stressed conditions, thereby preserving trust and confidence in money.

Temporary deviations from the 40:60 split would be permitted for firms to meet large unanticipated redemption requests. Enforcing the requirement at all times would require a stablecoin issuer facing net daily redemptions having to access same-day liquidity (likely via repo operations in private markets), or needing precautionary buffers of central bank deposits on top of the prescribed 40%. We propose that systemic stablecoin issuers will need to notify the Bank if the requirement of holding at least 40% in central bank deposits is breached and provide a plan to rebalance backing assets in a reasonable timeframe. We intend to provide more guidance on our expectations with regards to maintaining the 40:60 split in the next phase of the consultation planned for 2026.

In line with the principle that systemic stablecoins should be primarily used for payments, issuers are expected to play a very limited role in the transmission of monetary policy, as they would not engage in lending. Since participation in the transmission of monetary policy is the primary rationale for remunerating central bank reserves held by commercial banks, the Bank therefore proposes that the central bank deposits held by systemic stablecoin issuers as backing assets should not be remunerated. Further, in line with its view that systemic stablecoins should not be used as a means of investment, the Bank considers that issuers under its regime should not pay interest to coinholders (Section 2.4.1: Remuneration for coinholders).

Our proposals enable systemic stablecoin issuers to earn some return on backing assets. The Bank believes the proposal would allow systemic stablecoin issuers to be commercially viable while safeguarding financial stability.

To support long-term business model viability, systemic stablecoin issuers would need to ensure their business models are robust to different interest rate environments. While a high interest rate environment allows issuers to earn significant income from UK sovereign debt holdings, lower interest rate levels would reduce their income significantly and could make those business models that are overly reliant on income from backing assets unviable. Issuers should therefore ensure their business models are able to maintain viability over the long term. We encourage focusing stablecoin business models on the generation of revenue by payments-related activities and building new use cases that drive efficiency, reduce cost, and enhance functionality.

We expect systemic stablecoin issuers to have direct access to payment systems.

This would enable operations such as on or off-ramping and payments from commercial bank accounts into stablecoin accounts (and vice versa) to be conducted frictionlessly and settled in central bank money. If systemic stablecoin issuers are unable to access such payment systems directly, they may need to hold some cash balances at commercial banks strictly as a ‘float’ to facilitate redemption requests. Our views on the benefits of direct access to payment systems is further explained in Section 2.3.3: Legal claim and redemption.

In light of the changes to the backing asset proposals above, we are considering to provide access to a backstop lending facility for eligible, solvent, and viable systemic stablecoin issuers. This would allow them to borrow against sterling-denominated UK government securities in a limited set of circumstances.

The Bank will also continue working with HMT and the FCA to consider the most appropriate interim and comprehensive long-term solutions for managing failure of a systemic stablecoin issuer.

In line with our risk-based, proportionate approach to regulation, we propose a ‘step-up’ regime for stablecoins recognised as systemic at launch.

We propose allowing stablecoin issuers which are recognised as systemic at launch, to temporarily hold up to 95% of their backing assets in sterling-denominated UK government securities. The percentage would be reduced to 60% once the stablecoin reaches a scale where this is appropriate to mitigate the risks posed by the stablecoin’s systemic importance without impeding the firm’s viability. This aims to balance risk mitigation with the issuer’s viability.

While the Bank will be required to assess the specific facts at the relevant time, we acknowledge that financial stability risks are likely to be lower for stablecoin issuers recognised by HMT as systemic at launch and could be managed appropriately, if needed, by mobilisation limits. These are temporary limits designed to ensure that firms operate in a controlled and low-risk manner while they complete their set up and work towards meeting supervisory expectations. This would help to support a viable business model in the early stages while mitigating against risks. When and how an issuer is required to reduce the percentage of sterling denominated UK government debt securities to 60% would be determined on a case-by-case basis as firms scale.

The Bank is also working with the FCA to manage the transition for issuers that grow to be systemic, including the arrangement for how they would meet our requirements on backing assets without impeding the issuer’s viability.

2.2.2: Capital and reserve requirements

Proposed approach in the 2023 discussion paper We proposed to use existing international standards (the CPMI-IOSCO Principles for Financial Market Infrastructures, PFMI) as a baseline for calculating capital requirements for general business risk of systemic stablecoin issuers, with some modifications to account for shortfall risk to coinholders and lack of comprehensive arrangements to manage issuer’s failure.

to coinholders and lack of comprehensive arrangements to manage issuer’s failure. Regulatory capital of systemic stablecoin issuers should be proportionate and risk-based, reflective of the business models and risk profiles of each issuer. As such, we did not propose a fixed minimum capital ratio.

We proposed that issuers be required to identify risks that can lead to a shortfall in the backing assets, including operational risks such as fraud, cybersecurity incidents or mismanagement, and the costs of distributing assets to coinholders in the event of an issuer’s failure. Issuers should hold a reserve of assets to mitigate these shortfall risks (the shortfall reserve). These assets would need to be held by issuers on statutory trust for the benefit of coinholders so that they were not affected by an issuer’s insolvency.

Because general business risk could include risks captured under the shortfall reserve, issuers would be able to deduct the shortall reserve from the capital for general business risk to avoid duplication among risks captured.

In line with the location policy, capital of systemic stablecoin issuers must be held in the UK. Figure 3: Capital requirements and shortfall reserve as proposed in the 2023 discussion paper Industry feedback The regime should not be excessively burdensome when considered as a whole (capital, shortfall reserve, backing assets, and statutory trust).

Consider the impact on the attractiveness of the UK regime for systemic issuers when setting capital requirements. Proposed approach in this consultation paper We continue to propose to use existing international standards (ie the PFMI) as our baseline for capital requirements for general business risk of systemic stablecoin issuers, with some modifications to account for shortfall risk to coinholders and lack of comprehensive arrangements to manage issuer’s failure.

to coinholders and lack of comprehensive arrangements to manage issuer’s failure. We have revised our proposal to account for the proposed change in policy regarding backing assets, industry feedback, and further analysis of the risks.

We propose that issuers hold capital against general business risk, and reserves held on trust to mitigate financial risk and wind-down costs.

We also propose to maintain our policy that the assets funded by capital and reserves held on trust should be held in the UK. Capital We have removed the operational risk buffer from the shortfall reserve held on trust, as we agree with respondents that such risks could be mitigated by capital held for general business risk. This change should increase the resources available to the issuer to mitigate general business risks.

Capital is set as the higher of: The cost of recovery from the largest plausible loss event; or Six months of current operating expenses.

Capital should be in paid up capital, share premium, retained earnings and disclosed reserves (largely in line with Common Equity Tier 1 (CET1) capital).

Assets funded by capital must be high quality and sufficiently liquid for the risks they intend to mitigate. Reserves Issuers should maintain reserves of high-quality liquid assets to mitigate the financial risk of backing assets and cost of insolvency/wind down. These reserves should be held on trust, for the benefit of coinholders and insolvency practitioners. Questions Q3: Do you agree with our approach to mitigating risks to the issuer and coinholders via risk-based capital and reserve requirements? If not, what approach would you see as more appropriate for systemic stablecoin issuers?

Q4: Do you agree with our proposal that the reserves of liquid assets to mitigate the financial risk of backing assets and cost of insolvency/wind down should be held on trust ring-fenced from the general estate of the issuer? If not, do you have alternative proposals to mitigate risks to coinholders in the event of issuer’s failure/insolvency and in the absence of a comprehensive arrangements to deal with failure?

Q5: Do you have views on our proposal for calibrating capital for general business risk?

Q6: Do you have views on calibrating the reserve requirements for insolvency/wind down?

Capital and reserve requirements for systemic stablecoin issuers aim to mitigate risks to the firm as well as risks to the coinholders. Such requirements would ensure systemic stablecoin issuers have sufficient resources against their business risks to continue operations and services as a going concern, or ensure recovery or orderly wind down, without disrupting critical services or causing losses to coinholders.

Respondents to the discussion paper were largely positive on our risk-based approach to capital. Some respondents raised concerns about the proposal to allow issuers to deduct the shortfall reserve (held on trust) from the capital held for general business risk, noting this would reduce the issuer’s on-balance sheet capital. They also sought clarity on the proposal for wind-down costs to be held on trust, as such a requirement would be costly to the issuer and would diverge from current industry practice. Respondents also sought further detail on the types of capital instruments that would be considered eligible.

Considering this feedback and the proposed changes to the backing assets model in this consultation paper, we have revised our proposals for capital and reserve requirements accordingly.

We propose that issuers hold capital against general business risk and reserves to mitigate financial risk and wind-down costs.

Figure 4: Capital and reserve asset requirements for issuers of systemic payment stablecoins

We continue to propose a risk-based approach that reflects each issuer’s business model and risk profile, as opposed to having a fixed, asset-based capital ratio. We believe this proposed approach is proportionate, flexible and accounts for the potential differences in business models across firms.

The Bank proposes to use existing international standards (ie the PFMI) as a baseline for the capital requirement for general business risk. In addition, to reflect the proposed change in backing assets requirements and to account for the absence of a comprehensive regime to manage stablecoin failure (for example, in the banking regime there is a resolution regime and Financial Services Compensation Scheme (FSCS) protection), we propose that issuers hold a reserve of liquid assets which aims to mitigate the financial risk of backing assets and ensure coinholders can recover the full nominal value of their systemic stablecoins holdings, in the event of a failure of the issuer. These reserves should be held on trust, for the benefit of coinholders and also insolvency practitioners where reserves relate to the cost of continuing critical services and the distribution or transfer of assets to coinholders. Taking account of feedback to this consultation and market developments, we will continue to work closely with HMT and the FCA on what comprehensive issuer-failure arrangements for systemic stablecoins may be. Subject to that work, we expect to revisit the reserve requirement.

We propose that capital against general business risk should be sufficient to recover from the largest plausible loss event or equal to current operating expenses for six months (whichever is higher).

General business risk capital should cover risks that systemic stablecoin issuers may face during normal business operations. This includes operational or cybersecurity incidents or mismanagement, infrastructure failure, fraud, technology risks, and risks arising from third-party arrangements. To avoid doubt, general business risk excludes financial risks of backing assets and the cost of insolvency/wind down, and are to be met by the reserves of liquid assets below.

We propose this requirement to be set as the higher of:

Six months’ of current operating expenses; or

The cost of recovery from the largest plausible loss event.

Systemic stablecoin issuers are expected to identify the largest plausible loss event by modelling a range of severe but plausible loss scenarios relevant to their business. As mentioned above, such scenarios should consider risk events stemming from operational, technology and infrastructure sources including those arising from and/or due to failures of critical infrastructure, and service providers such as third-parties safeguarding backing assets.

In line with the PFMI, we propose that the regulatory capital of systemic stablecoin issuers is comprised of paid-up capital, share premium, retained earnings and other disclosed reserves. For reference, this is largely similar to CET1 capital instruments. This is to ensure capital of systemic stablecoin issuers can absorb losses on an ongoing basis and should be permanently available for this purpose. Also, we propose that issuers ensure the assets funded by capital are high quality and sufficiently liquid for their intended uses.

In addition to the capital held for general business risk, we propose that issuers hold a reserve of liquid assets to mitigate the financial risk of backing assets and to manage insolvency/wind down as required. These assets should be held on statutory trust.

Having considered the responses to the discussion paper, we no longer propose that systemic stablecoin issuers hold an ‘operational buffer’ in a shortfall reserve held on trust. Instead, we expect issuers to meet such shortfalls via capital for general business risk, as set out above. This will increase the amount of capital held by the issuer on balance sheet to support their business activities and reduce the complexities involved with accessing trust assets to absorb shortfalls due to business-as-usual risks.

To preserve trust and confidence in money and support full redemption in both going-concern and wind-down scenarios, we also propose that systemic stablecoin issuers should hold on statutory trust two reserves of liquid assets to: (1) top up shortfalls in backing assets due to financial risk; and (2) meet the cost of continuing critical services and distributing or transferring coinholders assets in the event of issuer’s failure.

Financial risk reserve , covering the market risk of holding short-term UK sovereign debt securities as permitted under the backing asset policy and the price impact when monetising such assets under stress. Market risk – we propose to use relevant parts of the proposed simplified standardised approach of the Prudential Regulation Authority (PRA) (including the multiplier for interest rate position risk, currently at 1.3). Price impact when monetising against short-term UK government debt securities – we propose the amount of reserves held for this purpose to be at least equal to the applicable haircuts for securities eligible for the Bank’s lending operations under the Sterling Monetary Framework (which is currently set at 0.5% of the fair value of such assets). To illustrate the potential cost, for a systemic stablecoin issuer with 60% of backing assets in short-term UK government debt securities with, for example, 93 days of remaining maturity, the reserve requirement for financial risk would amount to approximately 0.46% of total backing assets (including those held in deposits with the Bank). We propose the quality and liquidity of reserve assets to largely follow those of the short-term UK government debt component of permitted backing assets.

, covering the market risk of holding short-term UK sovereign debt securities as permitted under the backing asset policy and the price impact when monetising such assets under stress. Insolvency/wind-down reserve, covering the cost of appointing an insolvency practitioner, continuing the critical services and/or returning or transferring funds to coinholders. The cost of wind down could vary significantly and is likely to depend on the set up of issuers’ operations, including the choice and number of blockchains used, and outsourcing arrangements, among other factors. Issuers would be required to keep wind-down plans up to date and validated by external auditors. Issuers would be required to identify the estimated costs of wind down as the basis to calculate the reserves required for this element. The assets held for insolvency/wind-down purposes should be of high quality but could be of slightly higher maturity profiles than those held for financial risks, in line with the intended use. We anticipate that the cost of wind down can be reduced by organisational arrangements, robust record keeping and using industry best practices. Some of the choices we have made on key elements of the proposed regime – such as restricting backing assets to short-term UK government debt securities, providing deposit accounts at the Bank, expecting issuers to have direct access to payment systems and the possibility of a backstop lending facility – will result in lower reserve requirements than would otherwise be required.

covering the cost of appointing an insolvency practitioner, continuing the critical services and/or returning or transferring funds to coinholders. The cost of wind down could vary significantly and is likely to depend on the set up of issuers’ operations, including the choice and number of blockchains used, and outsourcing arrangements, among other factors. An issuer would be entitled to retain any income or gains from these two reserves provided that in doing so it complies with its obligations as a trustee and any other legal or regulatory obligations to which the issuer is subject. Consistent with our policy that coinholders will not receive remuneration on their holdings, such income or gains (for example, as a result of gains made on the underlying assets) could not be passed on to coinholders.

We think the proposed capital and reserve requirements, including the use of statutory trust, will provide the right protections for coinholders under current arrangements. The authorities will continue to work closely to determine the appropriate interim and comprehensive long-term issuer-failure arrangements for systemic stablecoins. Subject to that work, we expect to revisit these requirements.

We propose to maintain the Bank’s expectations on risk management as set out in the discussion paper. Systemic stablecoin issuers would be expected to notify the Bank as soon as practical if their capital, reserves, or the value of backing assets fall, or are likely to fall below the regulatory requirements. We also propose that they must have a credible plan to restore levels of capital, reserves, and backing assets within a reasonable timeframe. Systemic stablecoin issuers may wish to develop early warning indicators to help themselves and supervisors identify risks in advance. Where appropriate, the Bank may require recovery actions such as halting new issuance, raising capital, or preparing for a solvent wind down. More detail on our supervisory approach will be set out in a separate publication next year.

Q7: Do you have any other comments or suggestions on the proposals on the major policy revisions set out in Section 2.2?

Proposed approach in the 2023 discussion paper The Bank’s regime is for systemic stablecoins. In light of the activity performed and the risks posed, the Bank will be able to regulate critical entities in a systemic stablecoin payment chain, including service providers, if recognised by HMT. Industry feedback Requested further clarity and guidance on what constitutes systemic importance and how it would be determined in practice, including quantitative thresholds.

Raised concerns that being recognised as systemic may curtail the ability of stablecoin issuers to innovate and meaningfully compete in the market. Proposed approach in this consultation paper Following feedback to the discussion paper, we have included further clarity on systemic importance, including how the Bank intends to apply the criteria and factors, and assess against them in our advice to HMT.

As set out in Section 1: Introduction, Part 5 of the Act enables the Bank to regulate payment systems and service providers recognised by HMT. A service provider could fall under the Bank’s regime because it is systemic in its own right (for example, a custodial wallet that provides services to multiple payment systems or stablecoin issuers) and is therefore recognised by HMT as a service provider, or because it provides essential services to a recognised payment system or a service provider.

In considering whether an entity meets the recognition criteria, HMT must have regard to a list of factors set out in the Act. HMT may also make regulations about recognition orders and recognition criteria for systemic payment systems and service providers, including those using stablecoins. The Bank will consider the recognition criteria and the indicators set out below when providing information and advice to HMT in relation to a recommendation that an entity should be recognised.

The number and value of the transactions that the payment system presently processes or is likely to process in the future; the value of the services in relation to payment systems that the service provider presently provides or is likely to provide in the future. Some of the indicators that the Bank would consider include: the number and forecast number of coinholders; the number and forecast number of the value and volume of transactions/services provided; the value of stablecoins in, or likely to be in, circulation; and whether an issuer already has an established network that could be used to facilitate uptake of their stablecoins (for example, whether they are a big retail or technology firm).

Some of the indicators that the Bank would consider include: The nature of the transactions that the payment system processes or the nature of the services in relation to payment systems that the service provider provides. Some of the indicators that the Bank would consider include: the nature and risk profile of an entity’s activity, including the type of coinholders and the time criticality of the transactions/services provided; wholesale or retail nature of transactions – the use or purpose of transactions/services provided such as whether a stablecoin is used for cross-border payments, financial transactions/investments, monetary operations, or foreign exchange transactions; and the organisational structure, including the governance arrangements, business model and branding plans.

Some of the indicators that the Bank would consider include: Whether those transactions or their equivalent could be processed by other payment systems or whether those services or their equivalent could be provided by others. The Bank would consider: whether the payment system or service provider is substitutable – this includes whether or not other systems or services are readily available, and potential constraints that may hinder a payment system or service provider continuing the operation or service provision.

The Bank would consider: The relationship between the payment system and other systems or the relationship between the service provider and operators of payment systems that use DSAs and other service providers. Some of the indicators that the Bank would consider include: an entity’s interconnectedness with other systemically important financial market infrastructures and institutions and with the real economy and governments (eg, whether the stablecoin is used to settle transactions for governments, important financial markets or other financial market infrastructures); and institution-specific exposures including cross-ownership/cross-institution linkages.

Some of the indicators that the Bank would consider include: Whether the payment system is used by the Bank in the course of its role as a monetary authority. The Bank would also consider whether, by virtue of its links, the system could call into question the integrity of fiat money in the UK.

In addition to the above indicators, the Bank would also consider the use of the stablecoin as money or store of value, in particular with regards to the number and forecast number of the value of transactions/services provided, as well as the nature of the transactions/services provided. The Bank considers this of particular relevance when assessing the systemic importance of stablecoin issuers.

Some respondents to the discussion paper asked for quantitative thresholds to be published to clarify when a stablecoin might be considered systemic. We acknowledge that quantitative thresholds could be helpful in some circumstances, but we view that a single hard quantitative threshold risks sending false market signals. It could result in the recognition of stablecoin issuers that the Bank would otherwise not propose to HMT to be systemic. For example, a stablecoin facilitating cryptoasset trading could grow large enough to meet predefined thresholds, but would be unlikely to be proposed to HMT as systemic while the interconnectedness of unbacked cryptoassets markets with the real economy and financial sector remains relatively limited (a stylised example is in Box D).

The Bank’s assessment of entities in systemic payment chains is a holistic judgement made on a case-by-case basis. Qualitative factors, such as substitutability and interconnectedness with other systems, are among key factors which may determine a firm’s systemic impact in a stablecoin payment chain (as covered by the statutory recognition criteria). This approach therefore prepares us for a world where the likely scale and nature of the use of stablecoins for everyday payments is unknown.

We recognise that more information on how the Bank assesses systemic importance is important for the industry, especially given possible differences between the Bank and FCA regimes (eg backing assets requirements, potential holding limits). To provide more clarity around the Bank’s regulatory perimeter for payments in the context of stablecoins, we are providing three illustrative examples on how the Bank will assess systemic importance in the context of stablecoins and make a recommendation to HMT for recognition.

These examples are fictional and for illustrative purposes only. They are intended to illustrate how the Bank assesses the impact, or likely impact, of stablecoin payment firms on UK financial stability. The scenarios do not indicate specificities of business models or types of firms which the Bank may consider likely to be or become systemic. Any inferred similarities of these stylised examples to existing payment firms, service providers, or stablecoins are coincidental.

Box B: A payment system that is systemic at launch ‘Coin Group’ operates one of the UK’s largest social media and e-commerce platforms. Its UK subsidiary, ‘Coin UK’ plans to issue a sterling-denominated stablecoin, operate a payment system that enables the transfer of value using its stablecoin, and offer digital wallets to enable widespread use of its stablecoin for everyday payments in the UK. These services will be fully integrated across Coin Group’s global products, with plans for peer-to-peer (P2P) transfers and remittances, loyalty rewards, and offering low transaction fees for users. The Bank’s assessment in this example takes into account the following factors: Scale : Coin UK’s integration with Coin Group’s global platforms, products, services and large existing user base means forecast adoption and transaction volumes could scale quickly to reach systemic level in the UK through network effects.

: Coin UK’s integration with Coin Group’s global platforms, products, services and large existing user base means forecast adoption and transaction volumes could scale quickly to reach systemic level in the UK through network effects. Nature of use : The stablecoin would be used for everyday retail payments, P2P transfers, and e-commerce, creating heavy reliance on Coin UK for high-volume transactions.

: The stablecoin would be used for everyday retail payments, P2P transfers, and e-commerce, creating heavy reliance on Coin UK for high-volume transactions. Substitutability : Deep integration across Coin Group’s products and services and incentives (eg lower fees, rewards) could make switching costly for users, limiting alternatives in the event of disruption.

: Deep integration across Coin Group’s products and services and incentives (eg lower fees, rewards) could make switching costly for users, limiting alternatives in the event of disruption. Interconnectedness : Coin UK’s stablecoins and digital wallets will be used exclusively across its platforms and services, creating dependencies and tying in users amplifying systemic risk.

: Coin UK’s stablecoins and digital wallets will be used exclusively across its platforms and services, creating dependencies and tying in users amplifying systemic risk. Other relevant factors: As a contributing factor, Coin UK’s branding plans as the ‘future of money’ in the UK could impact the level of adoption and undermine confidence in money itself if disruption occurs. Based on these factors, the Bank judges Coin UK’s payment system is likely to be systemic at launch and recommends it for recognition as a payment system operator by HMT. The Bank considers Coin UK’s payment system likely to become critical to UK retail payments within months of launch. Its failure or disruption could threaten UK financial stability and have serious consequences impacting the real economy.

Box C: A service provider that is considered not systemic at present but may be considered systemic in the future ‘Coin International’ is a global stablecoin issuer with established US dollar and euro-denominated coins. These are widely used for crypto trading, cross-border payments, and retail transactions. It is authorised and regulated by the FCA in the UK for the issuance of its sterling-denominated stablecoin, launched two years ago. While Coin International does not operate a payment system, it has plans to promote its sterling-denominated stablecoin in the UK for retail payments, P2P transfers, remittances, and DeFi, through partnerships with major UK banks, large retailers, loyalty schemes, and by offering lower merchant fees. The Bank’s assessment in this example takes into account the following factors: Scale : Based on current forecasts, UK adoption and projected growth in retail transactions over the next two years are not expected to reach levels indicative of widespread usage.

: Based on current forecasts, UK adoption and projected growth in retail transactions over the next two years are not expected to reach levels indicative of widespread usage. Nature of use : Coin International’s sterling-denominated stablecoin is currently used primarily in gaming and crypto trading. Although it has plans to target everyday retail payments, the nature of the services it currently provides in relation to payment systems is at present unlikely to cause widespread disruption in the event of failure.

: Coin International’s sterling-denominated stablecoin is currently used primarily in gaming and crypto trading. Although it has plans to target everyday retail payments, the nature of the services it currently provides in relation to payment systems is at present unlikely to cause widespread disruption in the event of failure. Substitutability : The substitutability of Coin International’s services in relation to payment systems remains high at present based on the stablecoin’s limited use for retail payments. Substitutability may decline as more merchants adopt exclusive acceptance and offer discounts for use of Coin International’s sterling-denominated stablecoin, thereby potentially increasing switching costs in future.

: The substitutability of Coin International’s services in relation to payment systems remains high at present based on the stablecoin’s limited use for retail payments. Substitutability may decline as more merchants adopt exclusive acceptance and offer discounts for use of Coin International’s sterling-denominated stablecoin, thereby potentially increasing switching costs in future. Interconnectedness : Coin International has plans to integrate its sterling-denominated stablecoin with several banks, including major UK banks (eg through digital banking services, stablecoin debit cards), and is looking to grow its use for retail payments. The scale of these dependencies at present is not likely to transmit stress to banking and traditional finance, but the Bank would consider the scale of interconnectedness with other systems as retail payment use scales.

: Coin International has plans to integrate its sterling-denominated stablecoin with several banks, including major UK banks (eg through digital banking services, stablecoin debit cards), and is looking to grow its use for retail payments. The scale of these dependencies at present is not likely to transmit stress to banking and traditional finance, but the Bank would consider the scale of interconnectedness with other systems as retail payment use scales. Other relevant factors: Current speed of adoption and scaling for everyday payments, including as an alternative to traditional money, are not judged as likely to undermine confidence in money and payments if disruption/failure occurs. Based on these factors, the Bank judges that Coin International’s current and forecast scale for the next two years do not pose systemic risk. Depending on Coin International’s business plans, it could at some point be considered prospectively systemic.

Box D: A crypto firm operating at a limited scale and does not meet the statutory test for being systemic ‘Coin Exchange’ is a legal entity established in the UK, and authorised by the FCA as an operator of a cryptoasset trading platform. Coin Exchange allows users to trade a range of cryptoassets. Its use of sterling-denominated and other stablecoins is primarily for on and off-ramp transactions. It does not provide services to any payment systems recognised by HMT. The Bank’s considerations in this example take into account the following factors: Scale : Coin Exchange’s trading volumes involving UK users are relatively small and the volume of stablecoin use for retail payments is minimal. Coin Exchange’s transaction volume and services using stablecoins in relation to payments are unlikely to raise widespread concerns. Furthermore, the FPC has judged that while the interconnectedness of unbacked cryptoassets markets with the real economy and financial sector is growing, it remains relatively limited.

: Coin Exchange’s trading volumes involving UK users are relatively small and the volume of stablecoin use for retail payments is minimal. Coin Exchange’s transaction volume and services using stablecoins in relation to payments are unlikely to raise widespread concerns. Furthermore, the FPC has judged that while the interconnectedness of unbacked cryptoassets markets with the real economy and financial sector is growing, it remains relatively limited. Nature of use : The stablecoins traded on Coin Exchange, including sterling-denominated stablecoins, are not widely used for UK retail or wholesale payments. Coin Exchange’s primary use case of stablecoins is for crypto trading and on/off-ramp transactions, which the Bank does not consider to have financial stability impacts or risk confidence in money at present. It is therefore not currently in scope to be classified as systemic. Coin Exchange is not seeking to support stablecoin use cases for retail or wholesale payments.

: The stablecoins traded on Coin Exchange, including sterling-denominated stablecoins, are not widely used for UK retail or wholesale payments. Coin Exchange’s primary use case of stablecoins is for crypto trading and on/off-ramp transactions, which the Bank does not consider to have financial stability impacts or risk confidence in money at present. It is therefore not currently in scope to be classified as systemic. Coin Exchange is not seeking to support stablecoin use cases for retail or wholesale payments. Substitutability : Based on Coin Exchange’s business model, its cryptoasset trading platform does not raise substitutability concerns for UK payments.

: Based on Coin Exchange’s business model, its cryptoasset trading platform does not raise substitutability concerns for UK payments. Interconnectedness : Coin Exchange has no significant integration with UK banks or retail payment infrastructure, including payment service providers. It does not have any direct links to UK financial market infrastructure.

: Coin Exchange has no significant integration with UK banks or retail payment infrastructure, including payment service providers. It does not have any direct links to UK financial market infrastructure. Other relevant factors: Coin Exchange’s services are not within the Bank’s current proposed regime for systemic stablecoins. Based on these factors, the Bank judges that Coin Exchange does not meet the statutory test for systemic importance and is not likely to in the future. The scale and nature of its stablecoin use are not considered systemic. The Bank would not recommend to HMT for Coin Exchange to be recognised as systemic.

Proposed approach in the 2023 discussion paper The Bank considers it likely that, at least during a transition, limits would be needed for stablecoins used in systemic payment systems, to mitigate financial stability risks stemming from large and rapid outflows of deposits from the banking sector, and risks posed by newly recognised systemic payment systems as they are scaling up. The Bank did not propose a specific level for the limit but cross-referred to the proposed range the digital pound consulted on in 2023 for individual holding limits (£10,000–£20,000). Industry feedback Some respondents identified there could be restrictions on the usability of stablecoins if limits are set too low. Other respondents noted that setting lower initial limits were essential to preserving financial stability.

Respondents requested greater clarity around how limits would interact with the FCA’s regime, in particular that there could be unintended consequences on consumers (ie due to potential restrictions on usability when a firm becomes systemic). Proposed approach in this consultation paper We recognise that disorderly transition to widespread adoption of systemic stablecoins could pose risks to provision of credit to the UK economy.

We propose to maintain our overarching view that policy measures are needed to safeguard financial stability, by reducing the risk of large and rapid outflows of deposits from the banking sector. As a transitional measure, we are minded to use holding limits to mitigate this risk.

We propose that issuers implement per-coin holding limits of £20,000 for individuals and £10 million for businesses. There could be exemptions from the proposed £10 million business limits, if the business requires balances above it in the course of doing normal business.

We expect to loosen, and ultimately remove, such limits as we gain sufficient comfort that financial stability risks have been suitably understood and mitigated.

We remain open to views on alternative tools that could help achieve our desired outcomes, namely avoiding a disorderly transition, safeguarding financial and monetary stability, and preserving access to credit, while at the same time, not stifling innovation in payments and money. Questions Q8: What are the operational challenges to implementing holding limits or other tools we are exploring? How might those challenges be addressed, including for individual and business limits?

Q9: What are your views on the usability of stablecoins in the presence of holding limits, both for individuals and businesses? What use cases do you envisage would require exemptions from the proposed limits? What uses would not be possible given the proposed limits?

Q10: Other than holding limits, what do you consider are the tools best suited to mitigating the risks we have identified?

The Bank is committed to supporting innovation in payments and money. We recognise the transformative potential of technology associated with stablecoins and the important role that non-bank entities can play in a mixed payments ecosystem.

We recognise that confidence in money underpins both monetary and financial stability. In particular, a disorderly transition to widespread adoption of systemic stablecoins could pose risks to provision of credit to the UK economy. In contrast to some other comparable jurisdictions, where capital markets may play a larger role, UK households and businesses continue to rely heavily on the banking sector for credit provision. Given the current market structure, the provision of credit to households and businesses in the UK is particularly vulnerable to rapid deposit outflows from the banking sector. We recognise the potential for growth in funding directly from financial markets and non-bank financial institutions to support the provision of credit to UK businesses. We welcome higher competition in this space.

Our focus remains on safeguarding the continued provision of stable and regular credit to the UK economy, as we adapt to the growing role of systemic stablecoins used for retail payments in the UK. We expect the system to adjust over time, recognising that this could be over an extended period. If this transition is not carefully managed, there could be a sharp reduction in overall credit provided, or an increase in the cost of credit, which could have implications on the UK’s economic growth prospects.

As noted in the Bank’s 2021 discussion paper on new forms of digital money, a number of risks could arise as the market transitions to stablecoins. A disorderly transition to widespread adoption of digital money could pose risks to provision of credit to the UK economy. This consultation focuses on two different types of disintermediation scenario:

Disintermediation in the transition to steady state

As systemic stablecoins gain traction, there could be a reduction in bank deposits as funds are increasingly allocated to stablecoin-based activities. The degree to which this decoupling of payments and credit takes place could reduce the availability of bank funding, potentially increasing the cost or reducing the quantity of banks’ credit provision over time, to the extent that banks have not yet adjusted their funding sources or business models. This could be particularly pronounced if it happens rapidly or is disorderly, which may be a greater risk in a period where individuals, businesses and financial institutions are adjusting to these new forms of money. Given the important role of the banking sector in providing credit to households and businesses in the UK, it will be crucial to ensure that the transition does not cause undue disruption to the supply of credit and to support the real economy as it adjusts. We want to avoid undue disruption to the real economy during a transition to new forms of money.

Stablecoins regulated under this regime are intended to be a new safe form of money – sharing some properties of cash. Under the proposed Bank regime, systemic stablecoins would be backed by a combination of central bank money and short-term sterling-denominated UK government debt securities, and would have access to central bank lending. Unlike the banking system, they will not undertake lending to the real economy. In previous stress scenarios, such as the global financial crisis, we observed depositors rapidly moving funds from some banks into other banks which were perceived to be safer, as well as into cash and other safe assets. In future banking stress, digital money could provide additional perceived safe havens for depositors to move money into, potentially at speed. The banking sector could prove unprepared to withstand rapid large outflows of deposits and sterling money markets may also face disruptions – which could amplify stress with potential implications on availability and resilience of credit. Over time, banks would be able to take steps to ensure operational readiness, such as pre-positioning collateral to enable borrowing from the Bank during periods of stress.

Previous publications, including the Bank’s 2021 discussion paper and its responses, have made a case for the role of holding limits to manage financial stability risks in periods when the financial system is adjusting to digital money.

We have published a separate paper that considers both the potential for distributional effects across the banking system and potential outflows from the banking system in a stress scenario. Building on the analysis in 2021, it outlines a methodological approach for quantifying the risk of reduced lending to businesses and households, which will help to inform how the Bank assesses and mitigates the broader financial stability risk.

We are clear on the outcomes we want to achieve: avoiding a disorderly transition that undermines financial and monetary stability and access to credit, while at the same time, not stifling innovation in payments and money.

We will carefully monitor adoption of stablecoins to assess the potential for disorderly disintermediation and the potential impact on lending to the UK economy. This would allow the Bank to learn more about the extent of bank disintermediation associated with their use and the resulting impact on the cost and availability of credit. The impact is uncertain and depends, among other things, on the speed and scale of adoption of stablecoins.

The Bank understands that some of the potential use cases for stablecoins include their use as a settlement asset in high-value wholesale financial markets. This requires a separate set of considerations that we intend to explore via the DSS, where holding limits do not apply. This is explained further in Section 2.5.2: Approaches to innovation in wholesale markets.

Recognising the risks from disorderly transition and in line with the intended policy outcomes, we propose that issuers implement per-coin holding limits of £20,000 for individuals and £10 million for businesses. Systemic stablecoin issuers would need to comply with this proposed requirement, which is intended to be temporary. It would be loosened and ultimately removed as the market for credit adjusts to the new ecosystem, and risks to monetary and financial stability subside.

Holding limits would cap potential outflows of bank deposits to systemic stablecoins in aggregate and so limit the potential impact on credit availability. Our internal analysis indicates that the proposed holding limits could mitigate the financial stability risks identified above, as the UK economy transitions to widespread adoption of systemic stablecoins. Box E tries to illustrate such a scenario. Holding limits would be implemented on a per-coin basis, and so, for example, an individual would be able to hold £80,000 in total across four different stablecoins at a given time.

We recognise that holding limits would need to be suitable for the intended use cases for stablecoins, reflective of transaction volumes and holdings by the general public. We also recognise that the introduction of holding limits would need to be balanced against other considerations, including usability of stablecoins and potential implications for innovation. We consider that per-coin holding limits at the proposed levels would continue to allow stablecoins to be usable for the vast majority of retail payments.

Our separate paper also conducted additional analysis on the ability of households to use systemic stablecoins (‘usability’), which is important for unlocking their potential innovation benefits, measured as the ability of households and businesses to use digital money accounts to spend, receive and hold money.

Ensuring broad usability is important for systemic stablecoins, as this can help a larger share of payments benefit from innovations offered by Distributed Ledger Technology (DLT) technologies – such as automation and programmability.

Our internal analysis, guided in part by this paper, identified a range of £10,000 to £20,000 for holding limits, which would facilitate key usability criteria, with reference to being able to use the systemic stablecoin in a similar way to a current account. This analysis accounted for behavioural effects such as users building in a buffer to avoid exceeding their limit, which leads to lower effective usability for any given limit. Applying the limit at the top of that range increases usability – the higher the holding limit, the greater number of use cases for new forms of money, and the greater scope for a range of higher value transactions to benefit from programmability and other innovative use cases. For example, with a £20,000 holding limit, 94% of users would currently be able to receive their regular salary payments, and 90% of users would be able to hold their full current account balance.

We also considered the size of the proposed holding limit for businesses (£10 million) in the context of usability. Our judgement was that such limits should support a wide range of potential business-to-business use cases, similar to those seen today in commercial bank money. However, we did recognise that such limits may be too low for some business users. For example, if large numbers of individuals in the UK choose to pay for their shopping using stablecoins in the future, supermarkets could build up balances larger than £10 million. We therefore propose to put in place an exemptions regime – which could be implemented through issuers – to allow limits to be adjusted in such cases.

We recognise that it is difficult to predict the pace and volatility of adoption of stablecoins. As part of our monitoring period, we intend to regularly assess the uptake of stablecoins against these limits, which would inform when we choose to raise or lift them. This includes considering whether the trajectory of adoption is sufficiently high such that holding limits at their current amount are likely to bind in the future, and whether there is demand for temporary high holdings to facilitate higher value purchases in a single coin.

Engagement with industry since the Bank’s 2023 discussion paper identified the possibility of operational challenges in implementing holding limits for individuals and businesses. These include fundamental changes to stablecoin smart contracts which could affect their ability to interact with other parts of the system and a lack of technical solutions to monitor holdings across multiple wallets. In light of the proposed calibration of per-coin holding limits, this consultation welcomes further views on the specifics of these challenges from respondents and how they might be addressed.

Recognising the potential for challenges in implementing holding limits, we have also considered other types of limits, including aggregate and transaction limits. As set out in the 2023 discussion paper, aggregate limits for each stablecoin could lead to the price of stablecoins deviating from par if demand for a single coin outstripped its supply, although the extent of any deviation might depend on the availability of perceived substitutes and how the limits were set. In the extreme, large and persistent deviations from par might undermine trust and confidence in money. Transaction limits restrict the size or frequency of stablecoin transactions but would not prevent repeated daily transactions and rapid and sizeable bank deposit disintermediation. In light of the proposals in this consultation, we welcome views on the relative merits of these options – holding, aggregate, and transaction limits – along with other potential mitigants.

We also considered whether using tools reactively might be better suited to avoiding the scenarios highlighted above. These include imposing caps on the overall size of stablecoins if we see risks materialising, or loosening liquidity requirements on the banking sector to prevent a tightening in credit conditions. The challenges with using our tools in this way are that these may be less effective after a stress event has begun.

A further challenge we recognised when designing the policy on holding limits is the transition between the Bank and FCA regimes. This would happen where a stablecoin may start off in the FCA regime but then be brought into the scope of the Bank regime when recognised as systemic by HMT.

These transitional challenges are twofold. First, issuers would be required to make changes to the technical stablecoin smart contract and possibly other features of their business to implement and comply with the policy. Second, there could be an impact on businesses and consumers who would be faced with a holding limit when the stablecoin they use is recognised as systemic. Consumers would not have faced such changes to their terms and conditions or the usability of different payment methods when other payment systems were recognised as systemic by HMT and brought into the Bank’s remit previously. Such transition challenges could be managed carefully during any transition process to ensure readiness on the issuer side and prepare consumers. We welcome your views and suggestions for how any transitional challenges could be managed.

The holding limits proposed above are intended to be transitional. The Bank would expect to loosen, and ultimately remove, such limits as we gain sufficient comfort that financial stability risks have been suitably understood and mitigated. This approach reflects the Bank’s commitment to supporting innovation while maintaining trust and confidence in money and payments.

Box E: The role of retail holding limits in an increasingly digital world The future scale of adoption of stablecoins is uncertain. However, there could be a future where new forms of digital money, including stablecoins, tokenised bank deposits, and a potential digital pound are adopted at scale for payments in the UK. These digitally native payment instruments could be integrated seamlessly into our lives, social media and e-commerce platforms. Holders of these monies could start to develop confidence and trust in their value and use. A transition to such a future could happen quickly through network effects powered by social media, marketing, and e-commerce as functionality offered by non-bank payments creates use cases or other incentives that individuals and businesses desire. If stablecoins gain traction, banks’ activities in payments could quickly reduce, leading to a reduction in their deposit base. In this scenario, stablecoins could be widely used by households and businesses for everyday payments and be interoperable with existing forms of money. Depending on how such tokenised payments functionality is offered by commercial banks, customers might use applications that integrate stablecoins to manage their overall finances. These applications could automate holders’ decisions based on news events or other triggers, which automatically reallocate funds between bank deposits and stablecoins in real-time. Stablecoins could offer low transaction fees, incentivising users to hold and/or spend stablecoins. In such a world, deposit outflows from banks could occur rapidly and at scale, triggered by individual decisions and even by automated transactions powered by smart contracts. In a more digital future, where money moves automatically and at scale, the speed and magnitude of such outflows could be significantly greater. The resulting stress could exceed that seen in previous episodes, such as the stress experienced by some US banks in March 2023. Significant and rapid outflows from commercial bank deposits into stablecoins could lead to a precipitous drop in the availability of credit for businesses and households if the banking system were unable to increase, at scale and at pace, its use of wholesale funding. Over time, we expect access to finance for the real economy would stabilise – for example, banks would naturally adapt their funding sources and ensure they had sufficient collateral prepositioned at the central bank to deal with liquidity stresses – but such changes can take time. Transitional limits on retail stablecoin holdings, or alternative policies that achieve the same outcome, could act as a circuit breaker in such scenarios. They could help to ensure the pace and scale of outflows from banks is not precipitous so that the financial system has time to gradually adjust and thus ensure the real economy’s continued access to credit. We would expect to remove the limits once we see that the transition no longer threatens the provision of credit to the real economy.

2.3.3: Legal claim and redemption

Proposed approach in the 2023 discussion paper Coinholders should have a robust legal claim for the value of their stablecoins against the issuer and should be able to withdraw their funds on demand at the face value of the stablecoins without undue constraint or cost.

Issuers would be required to meet redemption requests of any size and at par.

Redemption requests should be processed by the end of the day on which a valid redemption request is made, and in real time wherever possible.

Issuers would continue to be accountable for compliance with the Bank’s requirements for redemption, including offering direct redemptions, if requested.

Fees should either be prohibited or reflect the cost incurred by the systemic stablecoin issuer or any other entity providing the redemption service. Industry feedback Respondents provided mixed feedback on the proposed requirement that all coinholders have a direct legal claim against the issuer.

Some respondents expressed concerns regarding the requirement of ‘same day redemptions’. They highlighted that the required anti-money laundering/know-your-customer (AML/KYC) verifications and onboarding process may make this requirement difficult to implement.

Respondents were also interested in understanding how the issuer could ensure compliance if intermediaries are used in the redemption process.

There was mixed response on prohibition of fees. Those in favour noted that fees would act as ‘haircuts’ and undermine trust and confidence in money. Those against noted that prohibiting fees could potentially shift fees to other service areas instead, such as maintenance fees. Proposed approach in this consultation paper We propose to maintain the policy proposals as set out in the 2023 discussion paper.

We further clarify our policy proposal on fees and set a new expectation for direct payment system access by issuers: We do not propose to prohibit fees. Systemic stablecoin issuers should provide redemptions free of charge, where possible, but may charge fees proportionate to the costs incurred. Systemic stablecoin issuers are expected to directly access payment systems that support interoperability across different forms of money, rather than through a sponsoring participant, in order to support frictionless redemptions.

Questions Q11: Do you have views on our proposal that systemic stablecoins should access payments systems that support interoperability across different forms of money, rather than through a sponsoring participant?

Respondents expressed mixed views on the proposed redemption process, including the direct legal claim against the issuer for all coinholders. Many called for greater clarity on how ‘end of day redemption’ would work, especially for customers who have not completed the onboarding process (AML/KYC). Respondents also highlighted concerns around operational challenges outside of RTGS operating hours and the practicality of having redemptions obligations fulfilled by intermediaries. Some respondents suggested a principles-based approach to redemption timelines and conditions.

There was general support for the Bank’s proposal to either prohibit or keep redemption fees proportionate. Those in favour of prohibition argued that fees could act as ‘haircuts’, thus undermining the ability of stablecoins to trade at par and compromising trust and confidence in money. Others cautioned that banning fees might lead to costs being shifted to other areas, such as maintenance charges. Some respondents suggested allowing fixed percentage add-ons to cover operational costs, and some sought clarity on how charges users pay to process and validate cryptoassets transactions (‘gas fees’) would be treated under the proposed framework.

We propose to maintain our policy that all coinholders have a robust legal claim on the issuer for the funds they hold. Issuers must honour redemption requests by the end of the business day on which a valid request is made, ensuring timely access to funds.

We propose to maintain all our previous policy proposals, providing further clarification on fees, and a new expectation on access to payment systems.

We continue to believe that all coinholders must have a robust legal claim against the issuer for the value of their stablecoins. This should be understood as giving all holders the right to redeem their coins on demand at face value without undue constraint and cost. We consider this to be one of the key elements of the framework that supports stability of value of the coin and contributes to maintaining trust and confidence in money.

In the discussion paper we set out a requirement that redemptions should be processed by the end of the day on which a valid redemption request is made. This is aligned with international standards (ie PFMI) that apply to all systemic payment systems and further PFMI guidance for stablecoins. Respondents requested further clarification on what a ‘valid request’ means. We propose that the issuer should initiate the transfer by the end of the day on which a redemption request is made, provided that coinholders have submitted in advance necessary documentation required for AML/KYC verifications. Issuers should have processes in place to ensure timely checks and verification are completed in time to meet the proposed 'end of day' requirement. In order to satisfy this end-of-day requirement, issuers should make clear ex-ante to coinholders the documentation required to be submitted with or in advance of a request.

The issuer remains responsible for meeting the regulatory requirements for redemption including fulfilling direct redemptions if requested. Use of intermediaries does not discharge issuers from this obligation.

The Bank recognises that there could be different ways in which redemptions are fulfilled and some issuers may use intermediaries (eg cryptoasset-fiat exchanges) to facilitate redemptions on their behalf. In line with the outcomes-focused approach, we do not propose to prevent or restrict any model, provided that issuers can demonstrate to us that risks are sufficiently mitigated and all coinholders can redeem in normal and stress times.

Outsourcing redemptions creates an additional dependency, and we would expect the issuer to manage risks related to indirect redemption as they would for any outsourcing arrangement. Irrespective of the model, the issuer remains responsible for meeting the regulatory requirements for redemption including fulfilling direct redemptions if requested. Use of intermediaries does not discharge issuers from this obligation.

We have reviewed the responses to the discussion paper on the proposal to either prohibit or allow proportionate fees for redemptions. We are proposing not to prohibit fees, recognising that fees are an integral part of payment chains and they also exist in current payments arrangements in commercial banking. Excessive fees, however, create frictions in the redemption process, prompting coinholders to sell stablecoins in secondary markets. During periods of stress, this could lead to stablecoins trading away from par value, increasing run risk and amplifying financial instability. Therefore, we propose that issuers should provide redemptions free of charge, where possible, and any fees charged should be fair, transparent, and proportionate to the costs incurred.

Fees should not be used as a mechanism to disincentivise the redemption of the coins. Issuers must not use fees to pass on any costs or losses arising from the sale of assets in the backing asset pool as part of meeting redemptions.

In addition to the above requirements discussed in the discussion paper, we propose to set a new expectation that systemic stablecoins should directly access payment systems to support frictionless redemptions, as well as interoperability across different forms of money, rather than through a sponsoring participant. Accessing payment systems directly reduces tiering and counterparty risks, brings down concentration risks, and limits single points of failure. It also supports interoperability – in the sense that all forms of money can be easily interchanged with each other – and therefore supports trust and confidence in money.

2.3.4: Safeguarding of backing assets and reserves

Proposed approach in the 2023 discussion paper Backing assets would be held on trust and subject to strict safeguarding rules.

Liquid assets funded by capital against shortfall risks to backing assets due to operational risks and wind-down costs (referred to as the shortfall reserve) should be held on trust for the benefit of coinholders and insolvency practitioners. Industry feedback Most of the respondents agreed with our policy proposal to have a safeguarding regime for the benefit of coinholders but pointed out implementation challenges of trust rules.

Some respondents highlighted that keeping assets to meet shortfall in backing assets due to operational risks could be excessive. Proposed approach in this consultation paper We propose to maintain our overarching policy that backing assets should be held in the UK (in line with the location policy) and held on statutory trust for the benefit of coinholders. We provide further clarification on our proposed requirements as a result of the revised backing model. Issuers must appoint qualified third parties for the safeguarding of backing assets, other than for those held with the Bank. Reserves of liquid assets for financial risk and insolvency/wind-down costs must also be held on statutory trust for the benefit of coinholders and insolvency practitioners, as set out in Section 2.2.2: Capital and reserve requirements.

for the benefit of coinholders. We provide further clarification on our proposed requirements as a result of the revised backing model. Questions Q12: Do you agree with our proposed approach to safeguard backing assets? If not, what alternative measures do you propose?

Q13: Do you have views on the proposed legal structure of the trust arrangements for backing assets and reserves to deliver the desired outcomes set out in this consultation paper? This includes feedback on the overall structure of the trust arrangements and whether these should be structured as a single trust covering both backing assets and reserve requirements or as two or more separate trusts.

We consider that, in the long run, comprehensive arrangements to manage the failure or insolvency of systemic stablecoin issuers may be needed, including measures to protect coinholders’ interests, address financial stability risks, and deliver equivalent outcomes to commercial bank money. We are working closely with HMT and the FCA to identify appropriate arrangements to safeguard coinholders’ interests in such scenario. Until such arrangements are in place, our proposed safeguarding regime for the insolvency/ wind-down reserve alongside other requirements aims to ensure that coinholders’ rights are protected and trust and confidence in money is maintained.

We propose that the safeguarding regime focus on two key elements, namely, segregation and statutory trust, and robust safeguarding rules.

Segregation and statutory trust : In the discussion paper, we stated that the statutory trust model would provide better protection to coinholders in insolvency compared to a debt model. The ‘trust model’ draws from the FCA’s Client Assets Sourcebook and would confer on coinholders a beneficial interest in the safeguarded assets held on statutory trust by the systemic stablecoin issuer, supplemented by a residual unsecured debt claim against the issuer itself to the extent of any shortfall. This would mean that coinholders’ proprietary claims against issuers (as trustees) for the par value of their stablecoin holdings are protected in both going and gone concern. We propose to maintain this proposal, consistent with the FCA’s approach for non-systemic stablecoins. As trustee, the issuer would have fiduciary duties to act in the best interest of the beneficiaries (coinholders). For the safeguarding of backing assets other than those held in deposits with the Bank, we are proposing that issuers should be required to appoint a qualified third-party custodian, who is a separate legal entity. However, as trustee, issuers would remain legally responsible for backing assets, including managing redemption requests and resolving discrepancies. We propose that the third-party custodians appointed must be authorised and regulated in the UK for the purpose of safeguarding client assets. We expect issuers to exercise due skill, care and diligence when selecting such third parties and ensure risks from such third parties are managed and provided for in capital for general business risks. We propose that the statutory trust should also hold reserves of liquid assets to mitigate shortfall risks to backing assets due to financial risks and to support costs of insolvency/wind down (Section 2.2.2: Capital and reserve requirements). The reserves would be held on similar terms to the backing assets, as described above.

: In the discussion paper, we stated that the statutory trust model would provide better protection to coinholders in insolvency compared to a debt model. The ‘trust model’ draws from the FCA’s Client Assets Sourcebook and would confer on coinholders a beneficial interest in the safeguarded assets held on statutory trust by the systemic stablecoin issuer, supplemented by a residual unsecured debt claim against the issuer itself to the extent of any shortfall. This would mean that coinholders’ proprietary claims against issuers (as trustees) for the par value of their stablecoin holdings are protected in both going and gone concern. We propose to maintain this proposal, consistent with the FCA’s approach for non-systemic stablecoins. Robust safeguarding rules: These rules would ensure that coinholders and supervisors have confidence that systemic stablecoin issuers maintain sufficient backing assets to meet redemption obligations at all times and to ensure an orderly wind down. The rules would cover the segregation of backing assets and reserves, the reconciliation of these assets with issued stablecoins, addressing discrepancies, shortfalls, and removing excess from the backing asset and reserves pool. The rules would also cover the organisational controls over the issuance, transfer, and holding of these stablecoins, as well as reporting on issuers, stablecoins, and backing assets.

We will consult further on the detailed design of the safeguarding regime in 2026, working closely with the FCA, HMT, and industry, including on any necessary enabling provisions for the Bank with regards to the statutory trust powers.

Proposed approach in the 2023 discussion paper The Bank recognises that DLT, where ledgers could be both permissioned and permissionless, present benefits in terms of efficiency and operational resilience. We also acknowledged that there is no single entity within permissionless ledgers responsible for comprehensively assessing the risks of the entire payment chain and building the right controls to mitigate them as required by international standards. We are open to future solutions that could mitigate the core risks of permissionless ledgers to a degree the Bank deems satisfactory. Industry feedback Almost all respondents agreed that public permissionless ledgers cannot be controlled by a single entity. This is an inherent feature of public permissionless ledgers and it would be difficult to require and achieve central governance of such ledgers.

Respondents wanted to understand whether being recognised as systemic by HMT would mean having to switch from using public permissionless ledgers to private-permissioned ledgers. They underlined that such expectation would not only undermine business models but also hinder innovation and competition. Proposed approach in this consultation paper We wish to clarify that we are open to the use of public permissionless ledgers by systemic stablecoin issuers, provided they can meet our expectations and ensure confidence and trust in money.

Areas where public permissionless ledgers may make this challenging are in relation to accountability, settlement finality, and operational resilience, including cybersecurity. We want to continue engaging with industry to better understand potential solutions and/or mitigants to these risks. Questions Q14: Do you agree with the Bank's view that the prominent risks around public permissionless ledgers are accountability, settlement finality, and operational resilience, including cybersecurity?

Q15: From the above risks, in your opinion, which ones are most crucial, specifically in the context of public permissionless ledgers, that necessitate Bank's focus and collaborative solutions?

Q16: Can you identify other risks which you believe that will have a material impact on these technologies in the future?

Our approach remains outcomes focused. We are open to the use of public permissionless ledgers, provided the risks relating to operational resilience (including cybersecurity), lack of accountability, and settlement finality can be managed in a way that ensures trust and confidence in money. We do not consider other ledger types – such as private permissioned ledgers – to be inherently risk-free and acknowledge that simple distinctions between ledger types can be misleading, particularly in relation to cross-cutting risks such as operational resilience and settlement finality.

We remain open to the use of public permissionless ledgers, but we maintain our view as set out in the discussion paper that public permissionless ledgers currently do not provide a clear locus of accountability and could result in heightened risks around operational resilience (including cybersecurity) and settlement finality. We want to continue working with industry to understand these risks and potential mitigants better.

Using public permissionless ledgers that do not have a clear locus of accountability is not consistent with current regulatory regimes which are built around regulated intermediaries that are capable of assuming and complying with legal requirements. While we do not seek to regulate public permissionless ledgers themselves, the key challenge is assigning accountability for any issues that might arise.

In terms of accountability, we will deem systemic stablecoin issuers responsible for achieving the standards and policy outcomes set out by the Bank with their technology choices in a robust manner. To emphasise, we are outcomes-focused and recognise that the relationship between issuers and public permissionless ledgers are likely to be different compared to existing practices that we observe among current FMIs. Such an approach is also consistent with ensuring that risks are managed prudently, and standards are maintained across different types of technology. We will do further work to set out what specific requirements we would expect to see from issuers in relation to the use of public permissionless ledgers. These will be clarified in upcoming publications.

Public permissionless ledgers may not be able to guarantee legally robust and clear settlement finality. This could mean that transactions are reversed despite the parties' perception that they were final, creating settlement risk. Industry efforts have been focused on achieving technical settlement finality and the Bank is also aware that there are gaps in the legislation to translate technical settlement finality to legal finality for DLT-based systems. HMT and the Bank are considering the legislation around settlement finality (Settlement Finality Regulations) to account for DLT, which may help to address some of these gaps.

We are also aware that the industry has made considerable effort to put in place mitigants for these risks. More generally, risk mitigants have evolved to address concerns around accountability and settlement finality with solutions around asset controls, fallback mechanisms, as well as broader business continuity and operational resilience approaches.

We note the current preference across existing stablecoin issuers to use public permissionless ledgers. We will therefore continue to monitor developments in ledger technology and assess their implications for financial stability. This includes looking carefully at the growing use of multiple public permissionless blockch