Context and Chronology

In oral and written evidence to a parliamentary financial committee, Coinbase framed the Bank of England’s draft prudential constraints as a determinative policy choice for sterling‑denominated digital money. Coinbase witnesses — including Mr. Duff Gordon and Coinbase UK executive Mr. Grose — argued that explicit holding ceilings and narrow reserve rules would block sterling stablecoins from operating as settlement rails for tokenized gilts, bonds and other institutional flows. The company urged regulators to remove the proposed individual and business holding caps, broaden eligible reserve instruments to include short‑dated UK government debt, and permit wholesale settlement use cases so tokenized capital‑markets activity can stay onshore.

Coinbase cited concrete operational frictions — slow authorisations, opaque access to banking corridors and unclear conduct rules for distributors — that together raise the transaction costs of running sterling rails inside the UK. The submission also recommended technical measures such as a liquidity facility for issuers to reduce forced asset sales during stress and governance rules that let distributors run holder rewards programs without creating deposit‑like risks. Coinbase framed these changes as necessary to preserve London’s competitiveness for next‑generation settlement plumbing.

The draft BoE approach described in related public material and by other witnesses takes a different tack: it treats widely used fiat‑linked tokens as elements of monetary plumbing and contemplates structural containment tools, including access to central‑bank accounts or liquidity backstops for systemic tokens. Notably, BoE drafting and the Lords inquiry papers reference a minimum backing arrangement that would require a material share of reserves to be held in central bank deposits — reported at around 40% — reflecting concerns about deposit migration from commercial banks and knock‑on NIM effects.

That divergence highlights a core policy tension. Coinbase views proposed backstops and temporary ceilings — quantified in its submission as an individual cap of £20,000 and a business cap of £10,000,000 — as functionally constraining wholesale settlement design; the Bank of England and other prudential voices emphasise reserve location (central bank vs. commercial bank or short‑dated government securities) as a mechanism to limit systemic contagion. The House of Lords Financial Services Regulation Committee has opened a targeted inquiry and set a March 11, 2026 deadline for written submissions; the FCA’s complementary consultation cycle is expected to feed into a phased implementation process stretching toward late‑2027.

International analyses and supervisory examples sharpen the debate. Standard Chartered modelling warns that large‑scale stablecoin issuance that does not recycle reserves into domestic banks can act like deposit withdrawals and compress net interest margin, especially at regional banks; Japan and South Korea have signalled narrow eligible‑reserve regimes and close supervision as one containment path. Those cross‑jurisdictional experiences frame the Lords’ planned hearings on operational resilience, reserve location, custody, stress‑testing and interactions with conventional banking regulation.

Operationally, the practical constraint is not only token design but predictable access to banking liquidity and settlement corridors. Coinbase and other industry participants argue that rules which ignore banking access and predictable liquidity tools will create a functional bottleneck and encourage issuers and institutional pilots to domicile around dollar‑pegged instruments or foreign custody arrangements. Conversely, central‑bank‑centric backing rules aim to limit the risk of runs and protect bank funding channels, but at the cost of narrowing reserve composition and potential on‑chain settlement utility.

Policymakers now face a trade‑off between containment and enablement: a strict, central‑bank‑deposit‑centric model and firm holding ceilings could push engineering and custody teams offshore; a more permissive reserve regime combined with operational liquidity facilities could preserve sterling’s role in tokenised settlement but requires robust stress‑testing, disclosure and bank access commitments. The outcome of the Lords inquiry, BoE and FCA consultations, and any cross‑agency coordination will determine whether London retains clearing and settlement relevance for tokenised markets or cedes it to jurisdictions with different trade‑offs.