Bank of England Softens Stablecoin Rules, But Keeps Sterling Tokens on a Short Leash

The Bank of England has softened parts of its proposed stablecoin framework, responding to industry concerns that the UK risked holding back pound-backed digital money just as other jurisdictions move faster to define the future of regulated stablecoins.

Under the revised approach, the central bank is dropping earlier plans to impose direct ownership caps on UK stablecoins. Instead, it will introduce a temporary £40 billion issuance limit per systemic stablecoin. The BoE also reduced the share of backing assets that issuers must hold in non-interest-bearing deposits at the central bank from 40% to 30%, allowing up to 70% of reserves to be held in short-term government debt.

The changes mark a more flexible stance from the UK regulator, but they do not amount to a light-touch regime. The Bank of England is still designing stablecoins as tightly supervised payment instruments, not as open-ended alternatives to bank deposits.

A Softer Framework, But Not a Free Pass

The original proposal would have limited individuals to holding up to £20,000 per systemic stablecoin and businesses to £10 million. Those limits drew criticism from crypto firms and payments companies, which argued that they would make sterling stablecoins difficult to use at scale.

The new £40 billion issuance cap is intended as a temporary guardrail while the financial system adapts to tokenized money. The BoE said the cap will be reviewed over time and removed once risks to credit provision have been addressed.

For issuers, the reserve change is also significant. Holding 30% of backing assets in non-interest-bearing central bank deposits instead of 40% slightly improves the commercial model for stablecoin providers. Still, the UK remains more cautious than markets where stablecoin reserves can be structured with greater income potential.

Banks Still Face a Tight Route

One of the most important parts of the framework concerns commercial banks. The BoE’s approach would only allow banks to issue stablecoins through separate non-deposit-taking entities with distinct branding.

That structure is meant to protect the traditional banking system from deposit flight and preserve a clear line between bank money and stablecoin money. But it could also make bank-issued stablecoins harder to launch at scale, especially if banks must create legally and commercially separate vehicles to participate.

That approach differs sharply from the direction being taken in the UAE, where local-currency stablecoins appear to be moving toward a more bank-led model. In the UAE, the Central Bank seems to be prioritizing banks and supervised financial institutions as issuers of AED-backed stablecoins, reflecting the view that regulated banks fit more naturally within the official monetary and payments architecture. The UK model is therefore more ring-fenced and containment-focused, while the UAE model appears more institution-first.

The BoE also plans to ban interest payments on stablecoins, while allowing transaction-style rewards. This reflects a wider global debate: whether stablecoins should remain payment tools or evolve into products that compete more directly with deposits.

The Bigger Question: Can Sterling Compete?

The UK’s challenge is not only regulatory. It is also market-based. US dollar stablecoins dominate the global stablecoin market, while sterling stablecoins remain a tiny segment.

That matters because stablecoins are no longer only used for crypto trading. They are increasingly being discussed as settlement assets for tokenized securities, funds, payments and other digital financial infrastructure.

If London wants to become a serious hub for tokenization, it will need credible sterling-denominated settlement assets. Without them, tokenized capital markets may continue to rely on dollar stablecoins or offshore structures.

This is where the BoE’s revised framework becomes strategically important. It gives the market a clearer path, but still keeps stablecoin growth within a controlled monetary architecture.

UK Chooses Control Over Speed

The Bank of England is trying to strike a difficult balance. On one side, the UK wants to support innovation, digital payments and tokenized markets. On the other, it does not want stablecoins to weaken bank deposits, create redemption risks or undermine confidence in sterling money.

The result is a framework that is more open than the first proposal, but still conservative. Issuers get more flexibility, but within strict reserve, redemption, capital and issuance rules.

The consultation remains open until September 22, 2026. The BoE plans to finalize its Code of Practice by the end of the year, with regulated systemic stablecoins expected to operate under the framework from 2027.

For the broader digital asset market, the message is clear: the UK wants stablecoin innovation, but only on terms that preserve monetary control. That may reassure regulators and banks, but it leaves an open question for issuers: whether sterling stablecoins can become commercially attractive enough to compete in a market still dominated by the US dollar.