The United Kingdom faces a critical juncture in shaping its stablecoin regulation, as a House of Lords committee warns that excessive rules could undermine the commercial viability of pound sterling-backed stablecoins. While the committee supports most elements of the Bank of England (BoE) and Financial Conduct Authority’s (FCA) proposed framework, it cautions that certain measures risk making the UK market uncompetitive and limiting growth in this emerging sector.
The report highlights that the UK currently trails behind other jurisdictions such as the United States and the European Union in providing a clear regulatory regime for stablecoins. This regulatory uncertainty has dampened development and investment domestically, especially compared to the thriving global markets for US dollar-pegged tokens like USDT and USDC. The Lords committee affirms the need for robust safeguards—such as backing fiat-referenced stablecoins one-to-one with high-quality assets and establishing a BoE backstop lending facility for systemic issuers—to ensure financial stability and protect consumers.
However, the committee expressed concerns over specific proposals outlined in the BoE’s November 2023 consultation. One such proposal requires systemic stablecoin issuers to hold a minimum of 40% of their backing assets in non-interest-bearing central bank deposits. This measure, criticized during the inquiry, could jeopardize the economic sustainability of issuers and weaken the international competitiveness of UK stablecoins. Additionally, the proposed temporary holding limits imposed on businesses and individuals risk unnecessarily constraining GBP stablecoin adoption and may prove difficult to enforce in practice.
The report also addresses the contentious issue of remuneration for stablecoin holders. The BoE’s draft framework would prohibit interest payments on sterling-denominated systemic stablecoins, aligning the UK with the EU’s Markets in Crypto-Assets Regulation (MiCA), which forbids stablecoin issuers from paying interest to users. This stance echoes provisions in the US GENIUS Act, though debate continues in the United States regarding whether intermediaries like exchanges can offer rewards or incentives. The Lords committee frames payment-oriented stablecoins primarily as instruments for efficient, low-cost transactions rather than investment products.
Nevertheless, the committee warns that combining strict reserve requirements with a prohibition on interest or similar remuneration could hinder the business models of UK stablecoin issuers. The uncertainty surrounding the acceptability of alternative incentives, such as card-style rewards, intensifies concerns about the long-term viability and attractiveness of sterling stablecoins in global markets.
After months of evidence collection, including testimonies from industry players and academics, the committee probed the extent to which stablecoins can evolve beyond mere entry and exit points for cryptocurrencies. It scrutinized potential risks relating to financial stability, bank funding, and consumer protection. The findings underscore the UK’s strategic challenge: to foster innovation in digital payments while safeguarding economic resilience and market integrity.