UK Plans to Grant Central Bank Digital Currency Innovation Legal Responsibilities
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
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The Bank of England previously took a defensive stance on stablecoins. Andrew Bailey publicly stated that the then-current form of stablecoins "is not money" and does not meet the standards for safe currency. The consultation draft for November 2025 still insists on holding limits of £20,000 for individuals and £10 million for businesses, and sets the proportion of non-interest-bearing central bank deposits at 40%. The House of Lords Financial Regulatory Committee and issuers subsequently countered, arguing that the rules would lock GBP stablecoins into a scale that cannot compete with dollar tokens. A policy statement in June 2026 made a clear concession: the removal of holding limits, raising the issuance cap to £40 billion, and increasing the bond reserve ratio to 70%. This time, writing "support for innovation" as a statutory secondary objective elevates this concession from a policy statement to an organizational incentive.
The capital path is not complex. 70% of the reserves for systemic stablecoins must be invested in UK government bonds or corresponding repos with a remaining maturity of no more than 6 months, while 30% is locked in non-interest-bearing accounts at the Bank of England, meaning holders do not earn interest, but issuers can benefit from bond coupons. This means that new issuance will directly increase demand for short-term government bonds while pulling some demand deposits from banks. The Treasury requires the central bank to report to Parliament annually, effectively using the political cycle to compress regulatory delays. The motivation is twofold: to fill the institutional gap for London compared to the US GENIUS Act and the EU MiCA, while also finding new rigid buyers for government debt.
The comparison is not with general crypto exchanges, but with the US turning dollar stablecoins into absorbers of government bonds and the EU using MiCA to cage issuance rights in a licensing framework. Circle and Tether have already rewritten the demand structure for short-term government bonds with dollar reserves; what the UK is doing now is the GBP version of the same path, but starting from a narrower base—GBP stablecoins account for less than 0.5% of the global market. The industry's position is still at the "opening door" stage rather than "controlling the market": the £40 billion cap is only equivalent to the size of a medium-sized dollar stablecoin, and the rules will not be fully operational until 2027, making the current phase one of institutional positioning rather than a scale battle.
Structural judgment belongs to the transfer of pricing power. Whoever can legally issue GBP tokens usable in retail and wholesale payments will gain access to currency. The mechanism is: once demand deposits are replaced by stablecoins that can be redeemed instantly, banks lose cheap liabilities, and their credit creation capacity declines; at the same time, government bonds become necessary collateral for stablecoins, binding short-term interest rates and fiscal supply to the rhythm of token issuance. Regulatory changes are merely superficial; at the core, the right to issue currency is partially shifting from commercial banks' licenses to licensed non-bank issuers.
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Regulatory easing essentially turns government bonds into new currency raw materials.
Stablecoins do not compete for bank profits; they compete for bank liability rights.
Once the secondary objective is legislated, conservatism will become dereliction of duty.