Stablecoins vs Tokenised Deposits: Which Will Shape the Future of UK Finance?

September 2025

Fintech & Payments

Shane O'Sullivan

Research Analyst

UK Finance has announced plans to run a tokenised deposit pilot with some of the UK’s largest banks, which is set to run until mid-2026. The pilot will also assess applications of tokenised deposits in the remortgage process and in digital asset settlement.

Tokenised deposits differ from stablecoins as they are traditional bank deposits represented digitally on a distributed ledger, and each token also corresponds to a pound held in a bank account. Issued by regulated banks, they remain backed by pre-existing deposits, and operate within existing banking regulations. In contrast, stablecoins can be issued by private companies and backed by fiat currency, commodities or cryptocurrencies; not being linked to specific deposits.

This pilot coincides with a recent warning from Andrew Bailey, Governor of the Bank of England; who in July, warned that privately issued stablecoins could threaten financial stability if they divert deposits away from the banking system. As such, do tokenised deposits have a major role to play in a safer financial system?

Regulatory Backdrop

The Bank of England has repeatedly emphasised the risks posed by stablecoins: potential disruptions to credit creation, loss of bank deposits, and questions over redemption rights and systemic resilience. The primary challenge is that widespread use of stablecoins outside of the regulated banking sector could fragment money itself.

In this context, tokenised deposits are emerging as a potential compromise. They offer a way to harness the efficiencies of digital payments while keeping funds within the established banking system and under regulatory oversight.

Tokenised Deposit Pilot

Earlier this September, UK Finance announced the launch of a 10-month pilot for sterling tokenised deposits (GBTD), with participation from six major banks including HSBC, Barclays, Lloyds, and Santander. Technology partners such as Quant Network are also backing the effort.

The pilot will test a range of use cases including person-to-person transfers in digital marketplaces to mortgage refinancing and asset settlement. The BoE and the Financial Conduct Authority (FCA) are observing developments closely, with outcomes expected to shape the UK’s regulatory approach ahead of stablecoin rules by late 2026.

Why the Move Towards Tokenised Deposits?

From a regulatory and market perspective, tokenised deposits provide several advantages including:

• Regulatory Alignment - Unlike stablecoins or privately issued tokens, tokenised deposits are simply commercial bank money in digital form. Thus, they stay within the existing regulated framework of deposits, balance sheets, capital liquidity, and depositor protection. Furthermore, due to being deposits, they inherit the same legal treatment as ownership rights and bankruptcy protection, without the need of establishing new legislation.
• Operational Efficiency - One key factor driving the implementation of tokenised deposits is that it can enable near instant, atomic settlement across a multitude of asset classes such as securities and capital markets, supply chain, cross-border payments, and mortgages with land registry. Additionally, this reduces ’trapped liquidity‘ and reconciliations, and leads to faster capital turnover. Payments can also be programmable, by issuing rules where deposits are only released on delivery, or refunds are issued automatically; thereby cutting manual errors and fraud.
• Reduced Systemic Risk - Unlike stablecoins, they do not draw liquidity away from the banking system as they remain on bank balance sheets, under prudential oversight. With tokenised deposits, all parties see the same real-time ledger, meaning exposure is visible instantly. This allows regulators to spot stress points early and reduce the chances of a systemic crisis from occurring.

Despite their appeal, many questions still remain. Interoperability, for instance, is questioned on whether tokenised deposits issued by different banks work seamlessly with one another, or will it be a closed system.

In regard to regulations, how will cross-border usage be overseen and what rules will ensure transactions are truly final once settled? Consumers may view tokenised deposits as no different from money in the banking app, meaning adoption may become slow without clear added benefits. Some would also argue whether these developments reflect genuine innovation, or if it is a defensive move to redirect momentum away from non-bank stablecoin issuers.

The Transitional Moment

The Bank of England’s stance suggests that privately issued stablecoins will face significant regulatory constraints. Tokenised deposits may therefore become a preferred method for digital money within the UK by preserving the stability of bank money while enabling many of the efficiencies promised by distributed ledger technology. While the UK’s Financial Conduct Authority is not expected to finalise stablecoin regulation until the end of 2026, banks now have the opportunity to experiment with tokenised deposits within existing regulations and build on new technologies to deliver faster and more efficient forms of money.

Many large lenders are examining and investing in both opportunities of stablecoins and tokenised deposits. Citi’s CEO, Jane Fraser was quoted in July 2025 as saying that while stablecoins present an interesting opportunity for Citi, the imminent priority is still tokenised deposits. This indicates that market leaders are positioning themselves to engage in open innovation as the market landscape is still ultimately uncertain, with both solutions serving slightly different purposes.

The next few years will be very divisive in whether tokenised deposits become the foundation of digital money in the UK or remain a niche alternative; overshadowed by other forms of digital currency. If the pilots show clear efficiency gains, regulators may encourage broader adoption; potentially integrating them with instant payments and settlement systems.

If doubts around interoperability, security, or consumer uptake for tokenised deposits persist, they could remain a niche tool rather than a mainstream innovation. Moreover, the debate over stablecoins has shifted the conversation.  The question is no longer whether money becomes tokenised, but who will control the process, and what risks society is willing to accept. 

Shane is a Research Analyst at Juniper Research, specialising in fintech trends, market forecasting and competitive analysis. He contributes to in-depth reports and strategic insights across digital banking, payments and financial inclusion. His work supports clients navigate emerging opportunities and regulatory challenges in the evolving fintech landscape.