Mind the gap: How stablecoins can secure the UK's financial future
Author(s)
Type
Report
Abstract
Stablecoins are being embraced at speed by consumers and institutions around the world. These tokenised representations of fiat currencies function as true digital cash circulating peer-to-peer and combine the stability of traditional money with the speed, efficiency, interoperability, and programmability of distributed ledger technology. They are reshaping cross-border payments, treasury management, trading, and financial infrastructure. They have emerged as the digital bridge between traditional finance and the digital economy, allowing financial institutions to offer better, cheaper, faster, and additional services while reducing their reliance on legacy IT systems. Stablecoins also promote financial inclusion by supporting remittances and expanding access to financial services for the unbanked.
The UK is the only major financial centre that has not yet introduced a stablecoin policy framework. The Financial Conduct Authority has published a consultation report as a step toward a comprehensive regulatory framework. Stablecoins will be essential to preserving and strengthening London’s centuries-old position as the world’s premier financial hub, as well as its leadership in FX markets and the digital economy.
Stablecoins, today essentially USD-stablecoins, already command a global market capitalisation of over $280 billion, which increases demand for US government bonds and entrenches dollar dominance. Major institutions from JP Morgan to Visa are building their future business models around them. Stablecoins represent a critical tool for reinforcing sterling's role and the UK's monetary sovereignty in a digital economy shaped by "digital dollarisation." Stablecoins offer the UK an opportunity to modernise its financial infrastructure while building on existing strengths. London's dominance in foreign exchange markets and prominent role in digital payments could be extended into digital asset trading and settlement through well-designed GBP stablecoins The regulatory clarity provided by a comprehensive stablecoin framework would enable UK-based firms to innovate responsibly, attract global stablecoin issuers, and position London as the natural hub for tokenised finance, a market that could reach $2 trillion by 2030.
Policy needs to address several macro-financial concerns. In particular, stablecoins need to be able to credibly maintain their peg, which unlike traditional pegged currencies, can be ensured through full collateralization with reserves held in safe, liquid assets like gilts and other fiat money vehicles, held in statutory trusts. Stablecoin schemes must also be designed to avoid outflows more rapid than those of insured deposits and to mitigate liquidity risk for financial institutions. Further, the role of banks in providing stablecoin-related services needs to be considered. Banks face stricter legal constraints than non-bank stablecoin issuers, including stringent KYC obligations, resolution planning, and deposit insurance requirements. As demand for tokenised money grows, banks could serve as wallet providers, stablecoin issuers, or directly tokenise deposits that comply with traditional account-based regulatory requirements. Each pathway will alter the structure of financial intermediation and could have significant implications for financial stability. Stablecoin design should also take into account the general decrease in bank deposit rates and the implications from an increase in demand for gilts.
In the hierarchy of money, stablecoins, like money created by banks, sit below central bank money, which in the UK may soon include the digital pound. However, a number of caveats apply. First, CBDCs are less flexible than stablecoins and designed for more limited use cases. Second, prior examples of CBDCs so far have not been very successful. Third, the time it will take the UK to roll out the digital pound will create an additional delay to the widespread adoption of digital money, which will harm digital adoption. Finally, if perceived as the safest instrument, CBDCs could crowd out not only bank deposits but also wider parts of the financial sector. To mitigate these risks, we recommend imposing adjustable (possibly negative) interest rate limits to stabilise demand.
Britain can design a stablecoin ecosystem that, like the EU's MiCA regulation, Singapore's Payment Token Services framework, and the US GENIUS Act, will establish requirements for full reserve backing and robust governance. We recommend to accelerate adoption of fully collateralised stablecoins, with collateral held in safe shelters and based on short-term gilts and other fiat money vehicles, which will increase demand for short-term gilts, and to resolve regulatory coordination between the FCA and the Bank of England and between the UK and other financial centres.
The UK is the only major financial centre that has not yet introduced a stablecoin policy framework. The Financial Conduct Authority has published a consultation report as a step toward a comprehensive regulatory framework. Stablecoins will be essential to preserving and strengthening London’s centuries-old position as the world’s premier financial hub, as well as its leadership in FX markets and the digital economy.
Stablecoins, today essentially USD-stablecoins, already command a global market capitalisation of over $280 billion, which increases demand for US government bonds and entrenches dollar dominance. Major institutions from JP Morgan to Visa are building their future business models around them. Stablecoins represent a critical tool for reinforcing sterling's role and the UK's monetary sovereignty in a digital economy shaped by "digital dollarisation." Stablecoins offer the UK an opportunity to modernise its financial infrastructure while building on existing strengths. London's dominance in foreign exchange markets and prominent role in digital payments could be extended into digital asset trading and settlement through well-designed GBP stablecoins The regulatory clarity provided by a comprehensive stablecoin framework would enable UK-based firms to innovate responsibly, attract global stablecoin issuers, and position London as the natural hub for tokenised finance, a market that could reach $2 trillion by 2030.
Policy needs to address several macro-financial concerns. In particular, stablecoins need to be able to credibly maintain their peg, which unlike traditional pegged currencies, can be ensured through full collateralization with reserves held in safe, liquid assets like gilts and other fiat money vehicles, held in statutory trusts. Stablecoin schemes must also be designed to avoid outflows more rapid than those of insured deposits and to mitigate liquidity risk for financial institutions. Further, the role of banks in providing stablecoin-related services needs to be considered. Banks face stricter legal constraints than non-bank stablecoin issuers, including stringent KYC obligations, resolution planning, and deposit insurance requirements. As demand for tokenised money grows, banks could serve as wallet providers, stablecoin issuers, or directly tokenise deposits that comply with traditional account-based regulatory requirements. Each pathway will alter the structure of financial intermediation and could have significant implications for financial stability. Stablecoin design should also take into account the general decrease in bank deposit rates and the implications from an increase in demand for gilts.
In the hierarchy of money, stablecoins, like money created by banks, sit below central bank money, which in the UK may soon include the digital pound. However, a number of caveats apply. First, CBDCs are less flexible than stablecoins and designed for more limited use cases. Second, prior examples of CBDCs so far have not been very successful. Third, the time it will take the UK to roll out the digital pound will create an additional delay to the widespread adoption of digital money, which will harm digital adoption. Finally, if perceived as the safest instrument, CBDCs could crowd out not only bank deposits but also wider parts of the financial sector. To mitigate these risks, we recommend imposing adjustable (possibly negative) interest rate limits to stabilise demand.
Britain can design a stablecoin ecosystem that, like the EU's MiCA regulation, Singapore's Payment Token Services framework, and the US GENIUS Act, will establish requirements for full reserve backing and robust governance. We recommend to accelerate adoption of fully collateralised stablecoins, with collateral held in safe shelters and based on short-term gilts and other fiat money vehicles, which will increase demand for short-term gilts, and to resolve regulatory coordination between the FCA and the Bank of England and between the UK and other financial centres.
Date Issued
2025-09-15
Citation
2025
Publisher
Imperial Business School
Journal / Book Title
Mind the gap: How stablecoins can secure the UK's financial future
Copyright Statement
© 2025 The Author(s).
Subjects
Stablecoins, CBDC, UK, Bank, Gilt, Peg, Collateral
Place of Publication
ssrn working paper series
Publication Status
Published