The Bank of England (BoE) has published its consultation paper on sterling stablecoins, bringing these cryptocurrencies a step closer to regulated financial infrastructure.
Industry experts hailed the move as a “marked shift” by the BoE from anti-stablecoins to being open to them. Market participants have until 10 February 2026 to respond to the consultation with the BoE aiming to publish rules for systemic stablecoins later in 2026.
As many custodians plan to offer digital asset solutions in 2026, the news may have several considerations for operations, business and processes.
At a glance
The BoE is the latest regulator racing to create frameworks for more than US$200 billion of stablecoins (backed by short-term government debt).
Its proposal allows systemic stablecoin issuers to hold up to 60% of their backing assets in short-term sterling-denominated UK government debt, and restricts those holdings to short-term maturities only. Its previous proposal was for backing assets to be held entirely in unremunerated central bank deposits.
BoE and Financial Conduct Authority plan to permit live transactions with financial instruments using certain regulated sterling and non-sterling stablecoins as a settlement asset in the Digital Securities Sandbox (DSS), which facilitates the use of DLT in trading, clearing and settlement.
The focus is on wholesale and retail payment stablecoins with a reserve composition. It follows the “Treasury-backed” model, creating demand for Gilt custody, and the potential to custody reserves.
What other jurisdictions are doing
In Europe, Markets in Crypto-Assets Regulation has been live since June 2024. This sets key requirements for stablecoins, including 1:1 reserve backing with high-quality liquid assets and custody segregation, reserves held by authorised custodians and the performance of regular attestations and audits.
In the United States, there is no comprehensive framework since the Genesis Act but custodians State Street and BNY Mellon are gearing up to provide solutions for digital asset custody without balance sheet treatment.
All three jurisdictions are converging on reserve backing (mostly short-term government debt); segregated custody (bankruptcy remote); authorised custodians; regular attestations (operational overhead).
However, while the UK/EU have comprehensive frameworks, the US is still fragmented but moving toward a bank-centric model.
The big two: Dollar dominance
Two firms – Tether (USDT) and Circle (USDC) – dominate the market. At the end of Q4 2024, Tether alone held US$94.5 billion in Treasuries, equivalent to less than 1% of total foreign-held U.S. debt and on par with Germany or the UAE, according to a new paper by the Brookings Institute. The key difference is that Circle is building within traditional infrastructure (BNY Mellon partnership), while Tether operates outside it.
Banks building parallel infrastructure
Banks are building parallel infrastructure for institutional settlement, with options to act as reserve custodian, settlement infrastructure provider, or both.
Some are pursuing blockchain settlement tokens for wholesale markets. For example, J.P. Morgan offers blockchain settlement tokens via Coin/Kinexys, used for repo settlement and cross-border payments between J.P. Morgan clients. State Street launched custody integration on J.P. Morgan Digital Debt Service, while Standard Chartered’s Zodia Custody) and DBS Bank are exploring similar blockchain settlement solutions.
Operational implications
Clients will be able to execute securities trades with settlement in USDC (instead of central bank money), requiring delivery versus payment (DVP) on blockchain. This carries key operational implications:
Settlement instructions and reconciliation: New messages and reconciliation tools are needed for blockchain-based standard settlement instructions (SSIs)
Settlement finality: Assessment of how to provide 24/7 blockchain settlement with business hours staffing
Failed trades: Pre-settlement validation becomes critical
Technology infrastructure: Wallet infrastructure, blockchain nodes (proprietary or third party), and API integrations with existing settlement systems
What’s next
In the short term, banks are monitoring BoE consultation, MiCA implementation, and U.S. legislation; and assessing reserve custody business cases. Further definitions on digital asset collateral acceptance, building digital custody capability or identifying partners will be key considerations in the medium term.
In the longer term, the consensus is that the future will be a hybrid world where traditional and digital settlement systems coexist.
The BoE paper signals that regulators are preparing for stablecoins as financial infrastructure, and they’re open to input on balancing innovation with managing financial stability risks.
