Seven different banknotes circulate in the United Kingdom today for each face value. Most are issued not by the Bank of England but by commercial banks in Scotland and Northern Ireland—the Royal Bank of Scotland, Bank of Scotland, Clydesdale, and three others. After a history of instability, these private banknotes have functioned safely for over a century under a modern regime that demands something stablecoin regulators are still struggling to achieve: genuinely risk-free backing.
The parallels between Scottish banknotes and stablecoins are striking. Both are privately issued claims on sovereign currency, designed to circulate at par. Both require public trust. And both have historically been vulnerable to the same temptation: issuers holding inadequate reserves to boost profits.
The UK resolved this problem decisively. Under the Banking Act 2009 and the Scottish and Northern Ireland Banknote Regulations, commercial banks issuing banknotes must back them pound-for-pound with Bank of England notes, UK coins, or deposits at the central bank. No government bonds. No commercial bank deposits. When you withdraw £50 from a Bank of Scotland ATM, that note is backed by assets held at the Bank of England itself.
Contrast this with the stablecoin regimes now emerging elsewhere. The US GENIUS Act, signed into law in July 2025, permits issuers to back their tokens with Treasury bills, repurchase agreements, money market funds, and deposits at commercial banks. The EU’s Markets in Crypto-Assets Regulation inverts the logic entirely and treats bank deposits as the safest reserves, mandating a 30% minimum, rising to 60% for significant tokens. The Bank of England’s November 2025 consultation on systemic stablecoins proposes a middle path: at least 40% of backing assets held at the central bank, with up to 60% in short-term gilts—more conservative than US or EU rules, but still a departure from the pure central-bank backing required of Scottish banknotes.
This permissiveness introduces risks that the UK’s banknote regime was designed to eliminate. When Circle held $3.3 billion at Silicon Valley Bank in March 2023, its stablecoin, ‘USDC’, temporarily broke its dollar peg—not because of any crypto-specific failure, but because reserves were trapped in a collapsing bank. Fractional-reserve dynamics had infected an instrument marketed as stable.
Government bonds present different risks. Treasury bills are liquid under normal conditions, but their value fluctuates with interest rates. If redemption requests spike during a period of rising rates, issuers may be forced to sell at a loss, deepening the very crisis they face. A stablecoin issuer forced to liquidate $10 billion in Treasuries at a 1% loss faces a $100 million reserve shortfall—fuel for a run, not a firebreak against one.
The systemic implications are considerable. Tether, the largest stablecoin issuer, holds over $100 billion in US Treasuries, enough that a forced liquidation during stress could itself move prices in short-term debt markets. A disorderly failure could disrupt payment flows, trigger fire sales that ripple into money market funds, and shake confidence in other digital assets.
The Scalability Objection
A sceptic might argue that the Scottish banknote regime works precisely because these notes are economically marginal. They circulate primarily within Scotland and Northern Ireland, are rarely used for large transactions, and represent a tiny fraction of the UK money supply. Stablecoins, by contrast, operate globally, settle billions of dollars daily, and are growing rapidly. Can a framework designed for a monetary backwater really govern instruments at the centre of digital finance?
The objection has force, but it proves less compelling than first appears. The Scottish regime’s success stems not from the notes’ marginality but from the backing requirement’s stringency. When every note in circulation is matched by central bank assets, scale becomes irrelevant to solvency—a £1 billion note issue is as sound as a £1 million one, provided the backing rule holds. The constraint on stablecoin growth would come not from the backing requirement itself but from the availability of central bank accounts and the willingness of monetary authorities to provide them.
This points to a genuine policy choice. If regulators want stablecoins to scale rapidly, they must either (a) relax backing requirements and accept the attendant risks, or (b) expand access to central bank balance sheets for non-bank issuers—a step most central banks have resisted. Option (b) is not merely politically difficult; it raises serious questions about monetary control, lender-of-last-resort responsibilities, and the risk exposure of central banks to a new class of private actors. The US GENIUS Act and EU MiCA have implicitly chosen option (a). The UK, by requiring 40% central bank deposits for systemic stablecoins, is experimenting with a hybrid. But the Scottish precedent suggests that option (b), however challenging, offers the most robust foundation.
The Offshore Objection
Stablecoin advocates offer a second counterargument: that strict backing requirements in major jurisdictions would push issuance to unregulated offshore venues, making the global system less safe overall. Better to have Tether operating under some rules than under none.
This argument echoes debates over tax havens and regulatory arbitrage more broadly, and suffers from the same weakness. The GENIUS Act and MiCA both restrict the use of non-compliant stablecoins within their jurisdictions. The enforcement challenge is real: crypto markets are global and digitally native in ways that make jurisdictional restrictions harder to police than for physical banknotes. But the direction of travel favours territorial regulation. As stablecoins become more integrated into regulated financial infrastructure—bank partnerships, fiat on-ramps, licensed exchanges—the value of operating outside major regulatory regimes diminishes. The question is not whether strict rules will eliminate offshore activity, but whether they will make the core of the system more resilient. The Scottish analogy suggests they would.
The Resilience Trade-off
The preference for maximal resilience carries costs that should be acknowledged. Stricter backing rules would raise operational costs for issuers, reduce or eliminate yield for users, and potentially slow innovation. But for an instrument whose raison d’être is to serve as a stable medium of exchange and store of value, safety must trump return. A stablecoin that offers yield but breaks its peg in a crisis has failed at its core purpose. The Scottish banknote regime reflects this priority: it sacrifices issuer profitability for user confidence. Stablecoin regulators face the same choice.
Lessons in Supervision
The UK’s banknote regime also offers lessons in enforcement. The Bank of England oversees commercial note issuers through daily and weekly reporting, on-site inspections of asset storage locations, and annual public reports on compliance. This infrastructure, developed over decades, ensures that backing requirements are not merely statutory text but operational reality. Stablecoin regulators building new regimes from scratch would do well to study how supervision actually works, not just what rules look good on paper.
The Bank of Scotland has issued banknotes since 1695. Three centuries later, those notes remain fully backed by central bank assets. As policymakers worldwide rush to legitimise stablecoins, they might look to Edinburgh for guidance. The choice is not between innovation and caution. It is between building a resilient digital monetary system and repeating the mistakes of the past, this time at the speed of code.
Jeff Alvares is senior legal counsel to the Central Bank of Brazil, former counsel to the International Monetary Fund, and a former member of the Financial Stability Board’s secretariat. He writes in a personal capacity.
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