UK regulator warns banks again of e-money and stablecoin contagion risk

The Prudential Regulation Authority (PRA) has sought to head off consumer confusion and possible contagion risks for deposit-takers from e-money and stablecoins in a recent letter reaffirming its expectations on innovations in the use of deposits, e-money and stablecoins.

The letter (11 pages / 309KB PDF), which was sent to chief executive officers of all banks and designated investment firms across the UK, clarifies that, for deposit-takers, stablecoins and e-money are to be issued by a separate, non-deposit taking, insolvency-remote entity with its own distinct brand distinguishing it from the deposit taker

The PRA says the letter focuses on risks linked to the retail market, highlighting particular concerns over potential “risks of contagion” if deposit-taking entities offer e-money or stablecoins under the same branding as their deposits. “Past experience, including as recently as the March 2023 banking turmoil, indicates contagion can happen quickly and is very difficult to reverse once it takes hold,” the letter warns. “As such, the PRA’s expectations are intended to help mitigate this risk, especially given the speed with which information can now be proliferated.”

From a product perspective, the PRA outlines clear pointers for senior management and compliance teams, including the expectation that both the name and presentation of e-money or stablecoin products are clearly differentiated from retail deposit products.

The letter also makes it clear that while the PRA expects deposit-takers may innovate with the form of deposits – for instance, tokenised deposits – they must ensure that innovation in the form of deposits is the only monetary innovation they provide to retail customers. The PRA also expects that deposit-takers’ innovations with deposits from retail customers meet the PRA’s rules for protecting depositors under the Financial Services Compensation Scheme (FSCS).

If deposit-takers or their groups want to innovate with the issue of e-money and stablecoins, the regulator said this should be conducted from a different entity that is not a deposit-taker, is insolvency-remote and has its own distinct branding.

Commenting on the PRA’s latest letter, David Heffron, financial services regulation expert at Pinsent Masons said: “Protecting the deposit taking activities and the wider deposit-taking group from adverse impacts if the e-money or stablecoin issuing entity runs into difficulties, or fails, is described by the PRA as the ‘key outcome’ it expects firms to achieve. Structuring the group so the issuer is insolvency remote is part of this, as is seeking to prevent what the regulator calls ‘contagion in confidence’ at the retail market level, by clearly distinguishing in the eyes of consumers the stablecoin or e-money issuing activities of the group from the deposit-taking business”.

According to the PRA, such “behavioural risks” are relevant because protections for retail holders of e-money and stablecoins are deemed “markedly” different from those for deposits, which are protected by the FSCS. If deposits and types of digital money which are not FSCS-protected are issued under the same brand, issues with the e-money or stablecoins could cause loss of confidence in deposits, and vice versa, the PRA’s letter explained.

Heffron added: “The PRA is writing again to reaffirm its expectations for how deposit takers and deposit taking groups that wish to innovate with deposits, stablecoins and e-money are to mitigate risks of confusion and contagion in the retail market, and to give further details in view of new business models and technology now being deployed. The PRA’s letter emphasises its expectations do not replace existing regulatory requirements for deposits, e-money and stablecoins.”

The PRA says firms must ensure customers receive “clear, prominent and ongoing information about the different protections that apply” and that its supervisors will consider the “overall customer experience” when assessing differentiation between stablecoins, e-money and retail deposits by banking groups which issue e-money or stablecoins.

Josie Day, a financial services regulation expert at Pinsent Masons, said the PRA is expecting banking groups “to draw a very clear dividing line” between the stablecoins and e-money they issue and their retail deposits business. The PRA’s letter says there may be a range of approaches firms can take.

Day added: “Firms should be considering not only the areas the PRA’s letter refers to specifically – notably name, branding, how customers access the product and information about it – but this suggests they also need to be thinking more broadly about how to differentiate from their retail deposits business the whole ‘look and feel’ of the e-money and stablecoin products they issue, throughout the retail customer journey and lifecycle of these products.”

Disclosures, warnings and on-boarding as well as customer education have an “important supporting role” the PRA’s letter said, but it also warned firms not to rely on these as the only way of mitigating risks of confusion by retail customers.

In light of recent innovation in money and payments, this letter supersedes an earlier ‘Dear CEO’ letter issued in 2023 that set out the PRA’s expectations then in these areas. Recent developments include the emerging new stablecoin regulatory regimes in the UK and globally, as well as the use of tokenised deposits. The current letter also points to secondary legislation passed in February 2026, which enables the regulation of stablecoins and cryptoassets in the UK.

The PRA recommends that banks read the latest letter in tandem with a ‘Dear CEO’ letter sent to banks last month on the prudential treatment of bank's cryptoassets exposures, updating firms and replacing the regulator’s previous expectations in an earlier letter.

The regulator said its expectations outlined in the May 2026 prudential letter would continue to apply “on an interim basis” until the PRA publishes its proposed future prudential framework. The PRA said it would consult on a proposed framework in 2028 “at the earliest”.