UK Stablecoin Regulation: A Historical Lens on Circle and Tether's 2026 Outlook

The central investor question is whether the UK's new stablecoin regime will create a viable, competitive market for established players like Circle and Tether. The answer hinges on the specific policy design, which is now taking shape through a two-pronged regulatory push from the Bank of England and the FCA.

The Bank of England's consultation proposes a clear, if restrictive, framework for systemic sterling stablecoins. Its core policy is a 40:60 split for backing assets, requiring at least 40% of reserves to be held as unremunerated central bank deposits, with the remaining 60% allowed in short-term UK government debt. This is a significant revision from an initial proposal that would have banned all remunerated assets, a move industry feedback deemed incompatible with viable business models. The new split aims to balance financial stability with issuer viability, though it imposes a cost on issuers who can no longer earn interest on their entire reserve portfolio. The regime also introduces a "step-up" mechanism, allowing issuers to hold up to 95% in government debt as they scale, before reverting to the 60% cap. This phased approach is designed to support growth while managing systemic risk.

This monetary policy framework is being built upon a broader, more comprehensive regulatory regime from the FCA. The FCA's CP25/40 proposes a comprehensive regime for cryptoasset trading platforms, intermediaries, and DeFi. This expansion of regulatory remit, set to take effect in October 2027, will bring new activities like stablecoin issuance and cryptoasset custody under formal supervision. The FCA's approach emphasizes market integrity and consumer protection while aiming to support innovation. It introduces permanent minimum capital requirements and a risk-based classification system for cryptoassets, creating a more formalized and transparent operating environment.

The bottom line is that the UK is constructing a high-barrier, high-certainty market. The Bank's asset split directly impacts the economics of stablecoin issuance, while the FCA's regime provides the foundational rules for the entire cryptoasset ecosystem. For Circle and Tether, this could mean a more stable, regulated environment to operate in, but also one with higher compliance costs and less flexibility than in more permissive jurisdictions. The competitive landscape will be defined by who can best navigate this new, stringent framework.

The Mechanics: Funding Costs and Business Model Viability

The proposed UK stablecoin framework directly attacks the core economics of the business model. For issuers like Circle or Tether, the viability hinges on generating yield from backing assets to cover operational costs and provide a return. The Bank's requirement that at least 40% of backing assets be held as deposits at the Bank (central bank deposits) and that these deposits be unremunerated is a fundamental shift. This forces issuers to hold a significant portion of their capital in a zero-yield asset, directly increasing their funding costs and compressing margins. It's a structural headwind that makes the business math harder from day one.

This cost pressure is compounded by the FCA's new prudential regime. The proposed permanent minimum capital requirements ranging from £75,000 to £750,000 introduce a fixed, non-negotiable expense. Unlike variable operating costs, this is a capital charge that must be maintained regardless of the stablecoin's size or profitability. For a company that might have operated with leaner capital in a lighter regulatory regime, this represents a new, permanent drag on returns. It raises the financial threshold for entry and scales the cost of compliance with the firm's activity level.

Finally, the admissions and disclosures regime (CP25/41) adds a layer of operational complexity and cost. Mandating detailed white papers and ongoing disclosures for any cryptoasset admitted to trading creates a compliance overhead that is both time-intensive and expensive. This is not a one-time setup cost but an ongoing requirement that ties up legal, financial, and operational resources. For a stablecoin issuer, this means diverting capital and talent from core business functions like technology development or customer acquisition to meet regulatory paperwork demands.

The bottom line is that the proposed rules create a multi-pronged pressure on the business model. The Bank's deposit rule attacks the yield engine, the FCA's capital rule imposes a fixed cost, and the disclosure regime adds a variable operational burden. For issuers, this means a higher breakeven point, narrower margins, and potentially a need to scale faster to achieve profitability. The framework aims to ensure stability, but it does so by making the underlying business more expensive to run.

Historical Analogies: Lessons from National Bank Notes

The current regulatory approach to stablecoins, embodied by the GENIUS Act, is not a radical departure from financial history. It draws a direct blueprint from the U.S. National Banking Era, a system that operated from 1863 to 1935. By examining that parallel, we can test the durability of today's framework and identify a critical structural gap.

The most immediate parallel is the overcollateralization principle. The GENIUS Act requires stablecoins to be fully backed one-to-one by safe, liquid assets. This mirrors the historical requirement where national banks could issue notes valued at up to 90% of the par value of the government bonds they deposited. This built-in cushion was designed to protect note holders, and it worked: no losses were ever incurred by holders of national bank notes during over 2,000 bank failures. The modern system's emphasis on priority claims in bankruptcy for stablecoin holders is a direct descendant of this protective logic.

The Bank of England's proposed 40:60 asset split for its central bank digital currency (CBDC) framework also echoes this principle, aiming for a similar buffer. This suggests a deep-seated regulatory instinct to anchor private money to a secure, public asset base. The GENIUS Act's structure, therefore, is a historically validated model for creating a stable, protected form of private currency.

However, the historical system had a dual business model that the current proposals do not explicitly address. National banks operated two distinct lines of business. First, they issued notes, earning interest on the government bonds used to back them while paying no interest to note holders-a clear capture of seigniorage. Second, they ran a standard commercial banking business, funding loans and securities through deposits. This created a powerful incentive: the note-issuing side was a low-cost, high-margin source of funding for the bank's broader lending activities.

The GENIUS Act's framework, by contrast, appears to separate the stablecoin function from the broader banking business. It does not grant issuers the same seigniorage benefits or the same structural role in funding traditional lending. This is a significant omission. In the historical system, the note-issuing business was not just a regulated activity; it was a core profit center that subsidized the bank's other operations. Without a similar dynamic, the economic incentive for banks to become stablecoin issuers may be weaker, potentially limiting the scale and innovation of the system.

The bottom line is that the GENIUS Act successfully replicates the historical system's core protection mechanism. But it leaves out the powerful economic engine-the dual business model-that made the old system so durable and profitable for banks. This missing element could determine whether today's stablecoin framework becomes a niche product or a transformative pillar of the financial system.

Investment Implications: Scenarios and Catalysts

The investment case for UK-issued stablecoins hinges on a single, pivotal catalyst: the FCA's final policy statements in 2026. These documents will transform the current consultation framework into binding rules, providing the regulatory clarity that firms need to commit capital and consumers need to trust. Without this confirmation, the market remains in a holding pattern, with potential issuers and investors waiting for the detailed roadmap. The primary investment thesis is that a well-designed regime will unlock a new, efficient payment layer, but its success is not guaranteed.

The key risk to this thesis is regulatory divergence. The Bank of England's consultation proposes a 40:60 split between central bank deposits and UK government debt for backing systemic stablecoins. This is a pragmatic middle ground, but it may not align perfectly with the approaches of the EU's MiCA framework or the U.S. GENIUS Act. If the UK's rules create friction for cross-border operations-by imposing different reserve requirements, custody standards, or reporting obligations-it could isolate the domestic market and limit the scale and liquidity of any UK-issued stablecoin. For investors, this divergence represents a material execution risk that could cap the potential addressable market.

The ultimate test for the regime, and thus for any investment in this space, is whether it can achieve the same balance that the historical national bank note system ultimately did. As the evidence notes, no losses were ever incurred by holders of national bank notes despite being privately issued, because the system was overcollateralized and backed by public debt. The modern parallel is clear: a stablecoin framework must support innovation in payments while rigorously safeguarding financial stability. The Bank's proposed step-up regime, which allows scaling issuers to hold more government debt, is a step toward this balance. It acknowledges that a viable business model requires issuer revenue, but it ties that flexibility to a firm's systemic importance and scale.

For investors, the path forward is to monitor the final rules for two critical signals. First, the precise backing requirements and liquidity management rules will determine the operational cost and scalability of issuers. Second, the explicit recognition of a backstop lending facility for solvent issuers would be a powerful signal of the Bank's commitment to stability, directly addressing the transition risks noted in the consultation. The scenario that supports the highest valuation is one where the UK establishes a clear, internationally compatible standard that attracts global players. The scenario that pressures valuations is one of prolonged uncertainty or rules that are too restrictive, stifling the innovation they were meant to foster.