The Bank of England has published new analysis showing that sterling-denominated systemic stablecoins and a future digital pound could heighten risks to UK financial stability if introduced without firm holding limits. The findings, released alongside its consultation on stablecoin regulation, highlight the potential for rapid deposit outflows during a banking stress and the resulting pressure on credit provision to households and businesses.
The paper warns that widespread adoption of digital money, whether privately issued stablecoins or a central bank digital currency, may accelerate the decoupling of payments from bank credit. UK banks rely heavily on short term retail deposits to fund lending. Faster and frictionless alternatives, the Bank argues, could make it easier for customers to move funds during periods of uncertainty, amplifying liquidity stress across the sector.
Severe stress simulations
Using a hypothetical severe scenario, the researchers tested deposit outflows under different holding limits for individuals and businesses. They measured the number of banks that would fall below a 100 percent Liquidity Coverage Ratio, the amount of central bank lending required, and the remaining shortfalls that banks would need to cover through asset sales or withdrawing credit lines.
According to the paper, the number of banks facing liquidity strains increases as individual limits rise from £5,000 to £20,000. Without any caps, the impact becomes significantly larger, with central bank liquidity demand climbing from around £112 billion under a £20,000 limit to roughly £250 billion if limits were removed entirely.
The analysis shows that even low limits would not eliminate risks, since many UK deposit balances are below £5,000. But limits remain essential for preventing extreme outflows in a crisis. Digital money could, the Bank warns, trigger a much faster shift away from commercial bank deposits than seen in previous UK stress events, given its perceived safety and cash-like properties.
Balancing stability with usability
The Bank also notes that strict limits could undermine the utility of digital money. Lower thresholds reduce financial stability risk but restrict the ability of consumers and businesses to use a digital pound or stablecoins as current-account equivalents. Higher limits increase functionality, allowing larger and more frequent transactions, but elevate the risk of sudden outflows during stress periods.
Policymakers will need to strike a balance between these competing objectives. Over time, the Bank says, the financial system may adapt through increased collateral pre-positioning or new funding models. As confidence improves, limits could be relaxed or removed during the transition to a mature digital money ecosystem.
The paper stresses that determining the right level of holding limits involves broader policy judgment beyond quantitative risk modelling. Distributional impacts also matter, as outflows may affect some banks more severely than others, especially those reliant on specific deposit segments.
Implications for the UK digital money roadmap
The findings underpin the Bank’s cautious approach as it evaluates both the proposed stablecoin regime and ongoing design work for a digital pound. While no decision has yet been made on launching a UK CBDC, the Bank’s modelling signals that safeguards will be central to any rollout strategy.
For industry, the message is clear. Digital money introduces new efficiencies and potential innovation, but also new channels for stress amplification. A controlled transition, with robust monitoring and adjustable limits, will be key to protecting the real economy during the shift toward a more digital monetary landscape.