Varun Paul is senior director of financial markets at digital asset infrastructure company Fireblocks. He leads Fireblocks’ collaboration with central banks and financial market infrastructure players. Opinions are his own.
The Bank of England’s consultation on systemic stablecoins marks an important step forward for Britain.
Allowing up to 60% of backup assets to be held as short-term government debt and giving stablecoin issuers access to deposit accounts with the Bank of England could make the regime more resilient in times of stress.
At the same time, some reserve requirements remain a challenge.
There is an opportunity to introduce more flexibility to support innovation and practical adoption by financial firms.
This is a marked improvement on the situation in Britain two years ago, and it is encouraging to see the Bank of England emphasizing financial stability while exploring tools such as liquidity facilities that could be really powerful.
Yet the framework falls short of its full potential: requiring 40% of reserves to be in accounts that do not earn interest, the regime remains uncompetitive globally.
Without further progress, Britain risks destroying any chance of a systemically important stablecoin within its borders.
Onshoring of stablecoin companies
Stablecoins are not just a technical innovation.
They play a practical role in improving payment efficiency, operational resilience and cross-border remittances. The consultation reflects a thoughtful effort to provide clear regulatory guardrails while recognizing that stablecoin business models rely on interest earned on reserves.
Perhaps the most innovative proposal in this consultation is the consideration of a liquidity facility for systemic stablecoins. While details are limited, this would go further than the US or any other regulator to date.
Having a liquidity support from the central bank could encourage stablecoin companies to consider the UK. But giving up 40% of revenue may be too high a price to pay for this privilege.
Personally, I would like to see the Bank reimburse part of the reserves that issuers have to keep with them.
That’s no small step for the Bank of England’s long-standing monetary framework, which only pays interest to banks. But the programmability of stablecoins and wholesale CBDCs now makes this kind of innovation possible.
It would show real leadership on the world stage. Establishing a regime that effectively balances stability and innovation can help maintain Britain’s relevance as a financial services hub in a rapidly evolving global market.
As this consultation phase gets underway, Britain still has the chance to set a new global standard, but that is not the case with these proposals.
New proposals
Stablecoins can modernize payments, improve operational resilience and strengthen financial infrastructure, but only if regulations can find the right balance between risk and opportunity.
Get them on the right track, by combining sensible supervision with flexible regulatory tools, and the Bank of England could encourage innovation in digital money while ensuring stability.
But if you calibrate them wrong, Britain could miss the stablecoin opportunity entirely.
Thoughtful refinements, particularly around reserve remuneration and liquidity support, would make the UK regime more operationally robust and support a forward-looking market.
At a time when the British economy could use a boost, the stakes are high.
And the world is watching.
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