The Bank of England’s new consultation on regulating sterling-denominated systemic stablecoins promises innovation, yet may instead shut it down. In this detailed analysis, Ben Lee, Partner in the Crypto Tax & Accounting team at Andersen LLP — the international tax and legal advisory firm — argues that the Bank’s proposed framework risks making a viable GBP stablecoin unworkable, driving UK innovators offshore and delaying the point at which advisers can safely integrate stablecoins into client portfolios.
In November, the Bank of England published its much-anticipated consultation paper on a proposed regulatory regime for sterling-denominated systemic stablecoins. Described as an opportunity to ensure that trust in “new forms of money” is preserved while “supporting innovation” in payments, the tone is cautiously optimistic. Yet despite multiple references to innovation (the word appears 37 times in the consultation), the proposed regime is characterised by the same caution that drives crypto businesses and capital abroad.
It should, of course, be a catalyst: the moment when foundations are laid for a credible, GBP-backed stablecoin to compete with ubiquitous dollar-pegged tokens. But the proposals reveal something quite different: a system smothered in layers of prudential oversight and regulations so complex that they potentially jeopardise the very innovation which the paper champions.
Notwithstanding references to confidence and competition, it ultimately proposes a regime which could make a viable sterling stablecoin almost impossible.
For IFAs and investment managers in the UK, that would be very disappointing. Currently, strict rules apply. They cannot use or recommend stablecoins because the UK regulatory framework is still evolving and most IFAs are limited to advising on regulated investments. In the meantime, they are waiting for clearer guidance before they can integrate stablecoins into their retail offerings.
At a glance
So, what might they expect?
Under the consultation paper, systemic stablecoins are defined as being “widely used in payments and [which] therefore may pose risks to UK financial stability.” Stablecoin issuers would be recognised by HM Treasury (HMT), and jointly regulated by the Bank and the Financial Conduct Authority (FCA): the Bank would handle prudential and systemic risk oversight while the FCA oversees consumer and conduct matters.
The consultation outlines how these roles intersect. Non-systemic stablecoins will remain under FCA supervision, whereas systemic issuers, making retail or corporate payments at scale, will be subject to joint oversight.
That dual structure is predicated on the idea that a stablecoin can be recognised as systemic before it enters the market. Advised by the Bank, HMT would be empowered to deem an issuer systemically important “prospectively”, causing the full weight of regulation to apply immediately.
Instantly systemic
Mastercard experienced more than 50 years of growth and global integration before being designated as a systemically important payment system. Yet under this proposal a start-up stablecoin issuer could instantly achieve the same status.
Regulation of most new financial products evolves proportionately: authorised by the FCA, then scaled and tested, and only once genuine systemic risk exists, brought under the Bank’s supervision. Whereas the new model starts from the top of the regulatory pyramid and works down, inverting the typical innovation cycle.
To support business viability and mitigate systemic risk, the consultation includes a “step-up” regime: at launch, systemic issuers can hold up to 95 per cent of their reserves in short-term UK government securities, gradually reducing to 60 per cent over time. To ensure immediate liquidity in a redemption crisis, issuers must still hold at least 40 per cent of their reserves as unremunerated deposits at the Bank.
In theory, the rationale is sound: protecting the public from runs. But in practice, this makes any sterling stablecoin immediately unattractive. As the consultation concedes, these requirements “may constrain innovation and limit exploration of new use cases,” favouring “firms that are large from the start and can leverage network effects.”
Such a model would effectively guarantee that only global incumbents, rather than British innovators, could afford to issue a GBP stablecoin.
Viability Problem
According to the Bank, systemic stablecoin issuers will remain commercially viable while stability is safeguarded. Yet the mechanics of its proposed regime suggest otherwise.
By mandating the 60 per cent and 40 per cent caps outlined above, the stablecoin issuers’ primary source of income is removed. Unlike banks, they cannot lend, invest, or earn spreads through trading. Their business model is contingent on the yield from their collateral assets. According to the consultation, low rates “could make those business models that are overly reliant on income from backing assets unviable.”
What the Bank proposes is bizarrely asymmetric: it demands that issuers behave like banks in terms of liquidity, but denies them the opportunities that make banking models viable. If the intention is to preserve confidence, the effect would be to eliminate competition.
Transition Risks
Moving from FCA oversight to Bank supervision will create “transition risks” and “regulatory uncertainty”, according to the consultation. Another joint consultation with the FCA is promised next year: to define how transition will work and to offer “a transparent and predictable pathway” into the new regime.
That will provide little comfort to issuers. The consultation process closes next February, with further detail on the joint regime appearing several months later and final rules anticipated at the end of year. There will, therefore, be no clarity until 2027 on how or when a sterling stablecoin might operate.
In today’s markets, that wait is an eternity. Meanwhile, other jurisdictions are encouraging stablecoin adoption: the US through the Genius Act, the EU through MiCA, and the UAE via its licensing structures. But the UK instead prefers to contemplate rather than act.
Expanded Definition
The Bank’s proposed remit in the consultation is also striking. If they are deemed to provide “essential services to a systemic payment system,” even wallet operators or payment processors could fall under its systemic oversight.
There would be a domino effect: any company that provides critical infrastructure to a systemic stablecoin could become subject to the regime. Although this makes sense from a stability standpoint, it risks diminished participation among service providers – wallet developers, fintechs, and payment innovators – that are central to a successful stablecoin ecosystem.
Through a framework modelled on financial market infrastructure (FMI) supervision, the Bank advocates its role supervising both systemic issuers and much of their surrounding ecosystem. Treating innovators like incumbents, a system designed for large clearing houses and payment networks would be transposed onto nascent digital networks.
Missed opportunity
The Bank’s paper does have its merits. The ambition to “support interoperability between systemic stablecoins, traditional and tokenised bank deposits, and central bank money” acknowledges the future landscape, while the proposed Digital Securities Sandbox is similarly progressive.
But such initiatives are exploratory, rather than enabling. Notable by its absence is any roadmap for a viable sterling-backed stablecoin that could compete internationally. Although the Bank no longer requires that all backing assets be held as unremunerated central bank deposits, the 40:60 split still makes profitability somewhat marginal.
Without a clear pathway for issuers to move from the FCA regime into systemic recognition, the result is a two-tier system that leaves start-ups in perpetual uncertainty. This will not promote innovation, but export it instead.
Stablecoins are now central to global payment infrastructure: USDC, USDT and PayPal’s PYUSD settle billions every day. If there is no equivalent sterling-denominated alternative, domestic payments infrastructure risks becoming increasingly dollarised – precisely what the Bank wants to avoid.
Protectionism, not sovereignty
Caution is understandable. But the Bank’s decision to allow a payments ecosystem to become potentially dominated by foreign-denominated tokens is not. It could erode sterling’s role in domestic transactions and expose the UK to external policy shocks.
Protectionism does not equate to sovereignty. Without a credible GBP alternative, the UK risks driving consumers and businesses towards dollar-denominated stablecoins by default. By trying to insulate the system, the Bank may simply strengthen the very dependency it fears.
From a risk perspective, requiring overseas issuers of sterling stablecoins to establish subsidiaries in the UK and hold backing assets domestically is prudent. But without a supportive commercial environment, few will take up the offer. Innovators will continuously migrate to the US and the UAE, where frameworks are clear, competitive and proportionate.
Price of Prudence
As a model of regulatory diligence, the Bank’s consultation identifies the right risks: liquidity shortfalls, redemption failures, contagion, and loss of confidence in digital money. But it offers the wrong antidote. In seeking to pre-empt every potential failure, it potentially jeopardises success.
If the UK really wants to be a leader in digital assets, there must be space for innovation. Stablecoin issuers should be allowed to launch under a proportionate FCA regime, grow responsibly, and then transition to Bank oversight. But only when scale and systemic importance are proven – not presumed.
If not, the UK’s approach will look less like responsible innovation and more like defensive retreat. For a country that claims to be Europe’s leading fintech hub, the irony is sharp: in the name of stability, Britain may over-regulate the future before it even begins.
Traditional IFAs and UK investment managers might therefore have a long wait ahead before they can recommend sterling stablecoins to their clients and fully integrate them into their retail offerings.
