Banks Prepare their Answer to Stablecoins: Tokenized Deposits

The United Kingdom is becoming a test case. The Bank of England recently softened parts of its stablecoin framework. It dropped proposed individual holding limits and replaced them with a temporary £40 billion issuance guardrail per systemic stablecoin. Issuers can hold up to 70% of reserves in short-term UK government debt, with the remainder in non-interest-bearing deposits at the central bank.

The Financial Conduct Authority lowered planned capital requirements for non-systemic stablecoin issuers from 2% to 1% of the value issued. The final UK crypto regime is expected to bring trading platforms, custodians, stablecoin issuers, and other crypto firms into full FCA authorisation from October 2027.

These moves show the UK trying to become more competitive without abandoning caution. The Bank of England is focused on protecting credit provision and limiting systemic risk. The FCA is trying to make rules workable for industry. Between those priorities sits the question of which form of digital money will dominate.

The U.S. debate looks different. American policymakers have been more willing to treat dollar stablecoins as a strategic tool that reinforces the global role of the dollar. That creates a contrast with the UK and parts of Europe, where officials emphasize financial stability and bank intermediation.

In crypto markets and cross-border payments, stablecoins may continue to grow quickly because they are already liquid and widely used. In regulated banking and institutional settlement, tokenized deposits may gain ground because they fit more naturally into the existing system. The two models may also coexist. Stablecoins could serve exchanges, wallets, fintechs, and global retail payments. Tokenized deposits could serve banks, corporates, and institutional settlement.

The competition will not be decided by technology alone. Regulation, trust, liquidity, interoperability, and incentives will matter. Stablecoins have market adoption. Tokenized deposits have institutional familiarity and regulatory comfort.

Banks cannot ignore stablecoins. They do not need to copy them exactly. Tokenized deposits give them a way to compete on blockchain rails while keeping money inside the banking system. Greene expects tokenized deposits to overtake stablecoins within five years.