Bank of England Targets Safer Digital Asset Systems Through Stablecoin Regulation
A central bank executive outlines key priorities: stablecoin oversight, digital security sandbox, and ensuring systemic payment system stability
The digital asset landscape is advancing fast, but according to Sasha Mills, Executive Director for Financial Market Infrastructure at the Bank of England, the pace of innovation must not outrun the principles of safety, soundness, and systemic stability.
“There are real benefits to digitalization and tokenization across the whole financial system,” Mills said, speaking about current trends.
But she emphasized that such transformation demands thoughtful oversight. “Any change introduces risk, of course. So we need to manage any transition well.”
Mills was clear that the Bank of England’s approach centers on payment systems and financial infrastructure with systemic implications. These systems, she noted, are not just peripheral components—they are the backbone of financial stability. That’s why digital settlement assets must meet high reliability standards, especially those intended for broad payment use across the economy.
Recently, the UK government took a significant step by publishing a draft statutory instrument to regulate crypto assets. The legislation expands the Financial Conduct Authority (FCA)’s remit to include the issuance and custody of fiat-backed stablecoins. Mills explained how this move fits within the UK’s regulatory ecosystem.
“Bringing that within the perimeter of the FCA allows a system-wide set of powers,” she said, referring to the FCA’s newly formalized authority over a broader range of crypto activities, including trading. This complements the Bank of England’s existing authority to supervise systemic payment systems.
Critically, Mills noted, “Backing with crypto assets is not seen as appropriate by us, for stability reasons for the payment systems.”
Instead, digital assets used in core payment systems must be backed by high-quality liquid assets to ensure financial resilience during stress events.
Tokenization Gains Ground
In London, at the Digital Assets Summit hosted by FT Live on May 6-7, Mills detailed how the Bank of England addresses the emerging world of tokenization—a process that allows financial assets to be represented digitally, often using blockchain technology.
She noted that tokenization is not confined to new cryptocurrencies or alternative finance. It extends to traditional securities and could one day encompass the entire balance sheet of the financial system.
“You can’t realize all the big benefits unless you’ve got digitally compatible assets and liabilities,” she said.
On the asset side, the Bank of England launched a Digital Securities Sandbox—a controlled environment where firms can experiment with new technologies and operating models.
“That allows firms to come in—they can be incumbents or new entrants,” she said. “We waive rules in that sandbox which allow for trading and settlement in the same legal entity, which is not something that you can currently do.”
Participants can use traditional databases or distributed ledger technologies (DLT), and experiment with both digital twins of existing assets and entirely native digital securities.
“New assets could be sliced up and diced up,” Mills said, describing how tokenization could unlock innovative business models and increase market accessibility.
She highlighted that this work is already generating results.
“We’re very pleased with the variety that we have in there, and they can experiment in a safe environment,” she said. The sandbox helps identify opportunities and operational challenges before new models are launched at scale.
On the liability side of the balance sheet, Mills pointed to the Bank’s exploration of how central bank money can be made digitally compatible with tokenized transactions. “At the moment, the payment leg—the cash leg—needs to be in commercial bank money because there aren’t alternative offerings yet,” she explained.
That is changing. The Bank is experimenting with what’s known as wholesale central bank digital currency (CBDC)—a digital form of central bank money that financial institutions could use for high-value transactions and settlement in financial markets.
A key initiative is the synchronization hub, enabling real-time coordinated payment and asset transfers.
“That’s the outcome that we’re seeking—that those risks are minimized, because that’s the certainty you need for the wholesale market to be functioning effectively,” Mills said.
Efficiency, Stability, and Limits
Mills acknowledged that tokenization brings exciting possibilities, especially in improving post-trade efficiency and reducing collateral friction.
“Those efficiencies can broaden and deepen markets, including liquidity and therefore financial stability, and that will feed through to greater economic activity and growth,” she said.
The benefits are clearest in areas such as collateral management, balance sheet optimization, and clearing and settlement. With streamlined processes, financial institutions could reduce costs and improve execution, ultimately passing on those gains to the broader economy.
However, Mills warned that these gains depend on thoughtful execution.
She said, “If executed well,” the digital transition will deliver tangible improvements. If not, the result could be new forms of risk and fragmentation.
One long-term implication is that intermediaries may be disintermediated as tokenized finance matures.
“In the longer run, you might expect to see some intermediaries fall away,” Mills noted, adding that vertical integration may become more common in future financial market structures.
Global Consistency, Local Adaptation
The UK is not acting in isolation. Mills emphasized that the Bank of England works closely with international peers through forums like the Financial Stability Board (FSB) and Committee on Payments and Market Infrastructures (CPMI).
“Things won’t be precisely the same,” she acknowledged, “but if the outcome is comparable, that provides more consistency.”
Global alignment is particularly important for stablecoins and cross-border transactions. By anchoring its work in international standards, the UK aims to ensure that its markets remain interoperable, competitive, and secure.
Another area of growing interest is transatlantic cooperation. Mills confirmed that discussions are underway on a potential transatlantic sandbox—a collaborative framework that could allow firms to test cross-border innovations in the UK and the US. Though still in the early stages, such initiatives underscore the importance of cross-jurisdictional experimentation.
What Comes Next
Looking ahead, Mills suggested that the Bank is preparing to enter a new phase of policy development based on industry feedback. “We’re in the process of reflecting,” she said, referring to comments received from the Bank’s earlier discussion papers on systemic firms and digital asset infrastructure.
“There are probably some aspects of the regime that we would amend going into the next wave,” she added. While she did not specify which aspects might change, the Bank appears open to refining its approach as the landscape evolves.
Ultimately, Mills’ message was clear: innovation must work with—not against—the foundational principles of financial stability. By grounding its work in evidence, collaboration, and flexibility, the Bank of England hopes to guide the digital transition without undermining trust in the system.
“In terms of how we would design any central bank digital currency or these other experiments,” she said, “that’s the outcome that we’re seeking—that those risks are minimized.”
As the digital economy accelerates, those outcomes will become ever more critical. In Mills’ view, they must be achieved deliberately, methodically, and safely.