Bank of England sets GBP £40 billion stablecoin guardrail

KAREN JOY BACUDO

Finance Editor

The Bank of England has published a policy statement and draft rules for systemic stablecoin issuers, advancing the UK’s regime for sterling-denominated stablecoins.

The framework sets out how issuers of systemic stablecoins would be regulated as these digital tokens take on a larger role in payments. It covers stablecoins that could become significant enough to pose risks to financial stability if their design or operation were to fail.

The publication follows consultation with industry and other stakeholders and includes revisions to proposals issued last year. One of the main changes is an increase in the maximum share of backing assets that may be held in interest-bearing assets – specifically short-term UK government debt – to 70% from 60%.

The remaining backing assets would need to be held in central bank deposits to help issuers meet redemption requests promptly.

Another significant change concerns growth limits. Instead of the temporary holding limits proposed earlier, the Bank would introduce a temporary issuance guardrail for each systemic stablecoin.

The initial level for that guardrail would be set at GBP £40 billion. The measure is intended to protect the economy’s access to credit while allowing households and businesses to use stablecoins without restrictions.

Rule changes

The issuance guardrail would be reviewed regularly and removed once risks to credit provision had been addressed. That marks a shift from earlier proposals, which focused on restricting the amount individuals or businesses could hold.

Officials are also working with the Financial Conduct Authority on what the Bank described as an end-to-end regime. This includes arrangements for firms moving from non-systemic status, in which they would be supervised solely by the FCA, to systemic status, in which the Bank would assume a direct role.

The division of responsibilities is a key feature of the framework. Stablecoins used for non-systemic purposes, including buying and selling cryptoassets, would remain outside the Bank’s regime and be supervised only by the FCA.

Under the Banking Act 2009, HM Treasury decides whether to recognise a payment system as systemic. That judgment depends on whether weaknesses in its design, or disruptions to its operation, could threaten financial stability, undermine confidence in the UK financial system, or have serious consequences for businesses and other interests across the country.

Payments focus

Stablecoins are digital tokens designed to maintain a stable value, typically by being backed by assets. Policymakers have examined them as a possible way to support payment services, including cross-border transactions, while raising questions about redemption, liquidity and their wider effect on the financial system.

The latest package is intended to give issuers clearer conditions for growing in the UK while preserving confidence in money. The Bank also linked the work to the government’s broader strategy for the payments sector.

Sarah Breeden outlined the Bank’s view of the package in a statement accompanying the announcement.

“This is a major milestone in delivering greater choice and innovation in UK payments. Innovation thrives on trust. And today we’ve set out the foundations of that trust for a new form of money – with prompt redemption, strong protections and central bank support. This is truly a world-leading regime,” said Sarah Breeden, Deputy Governor for Financial Stability at the Bank of England.

The Bank will consider feedback on the draft code before finalising the framework. It intends to complete the Code of Practise by the end of the year, with further material to follow as joint work with the FCA continues.

The publication provides the clearest indication yet of how the UK plans to regulate stablecoins that become significant enough to affect the wider payments system. A central feature of that approach is the requirement for systemic issuers to hold backing assets in short-term UK government debt and central bank deposits, while operating under a temporary GBP £40 billion issuance guardrail.