The UK Treasury plans to add a statutory secondary objective for the Bank of England, requiring it to support payment system and digital currency innovation, including stablecoins and other forms of digital currency, while maintaining financial stability. This objective will be included in the Financial Services and Markets Bill to be submitted to the House of Lords for review.

The Treasury clarified that financial stability remains the primary responsibility of the Bank of England, with the innovation objective being secondary. The central bank must report annually to Parliament on its progress. Chancellor of the Exchequer Lucy Rigby stated that tokenization and distributed ledger technology will transform global financial markets, and the secondary objective aims to promote payment and digital finance innovation, maintaining the UK's leading position in financial services.

Sarah Breeden, Deputy Governor of the Bank of England, welcomed the arrangement, stating that the central bank is working with the government and other regulators to maintain trust in payments and promote innovation. This move is interpreted as the government urging the central bank to more actively position London as a center for stablecoins and digital assets, responding to previous industry criticisms of overly conservative regulations.

This arrangement builds on the stablecoin rule adjustments implemented in the first half of the year. The Bank of England has abandoned limits of £20,000 for individuals and £10 million for businesses, replacing them with a temporary issuance cap of £40 billion for each systemic stablecoin, and increasing the proportion of reserves that can be allocated to short-term UK government bonds from 60% to 70%, with the remaining 30% held in non-interest-bearing central bank accounts.

Systemic GBP stablecoins will be jointly regulated by the Bank of England and the Financial Conduct Authority after being recognized by the Treasury; non-systemic issuance, custody, and trading access will be regulated solely by the latter. The draft rules are open for public consultation until September 22, and the Bank of England plans to finalize the code of conduct by the end of the year, with regulated stablecoins expected to operate in the UK starting in 2027.

In terms of market mechanisms, this is policy-driven rather than immediate capital repricing. Buyers include GBP stablecoin issuers, payment institutions, and wholesale market participants seeking compliant channels; sellers and those under pressure are commercial banks worried about deposit outflows and credit supply being replaced. The funding path involves moving some demand deposits into tokenized currency backed by short-term government bonds and central bank deposits. Beneficiaries are issuers and the government bond supply side that can earn reserve income, while those under pressure are banks' balance sheets reliant on low-cost deposits. The global stablecoin market is approximately $310 billion, with GBP-denominated shares accounting for less than 0.5%; this legislation aims to open up the supply cap for GBP tokens.

Source: Public Information