UK stablecoin rules risk slowing digital payments growth

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Highlights

House of Lords financial regulation committee warns that UK regulatory uncertainty and proposed stablecoin rules diverging from international norms risk slowing GBP stablecoin adoption.
Proposed UK rules include temporary ownership caps of £20,000 for individuals and £10 million for businesses, and requirements for unremunerated deposits at the Bank of England, making the sector less attractive.
Regulators, including the Bank of England, are considering softening some restrictive measures amid concerns that current proposals hinder innovation and leave the UK less competitive than rival jurisdictions.

House of Lords urges rethink on oversight

As reported by the House of Lords financial regulation committee, a report published on Wednesday says regulatory uncertainty is holding back GBP stablecoins and that several proposed UK rules diverge from major international jurisdictions.

Stablecoins are digital tokens designed to maintain a one-to-one peg with a fiat currency such as the U.S. dollar. The market is worth about $310 billion and is dominated by U.S. dollar-backed coins from issuers including Tether and Circle, while less than 0.5% of stablecoins are denominated in sterling.

The committee says the UK has gone too far in several areas, including its plan for two separate regimes, one run by the Bank of England for systemic stablecoins and another by the Financial Conduct Authority for all other tokens. It also highlights concerns over proposed temporary ownership caps of 20,000 pounds for individuals and 10 million pounds for businesses, as well as limits on commercial banks issuing their own stablecoins.

Baroness Sheila Noakes, who chairs the inquiry, says it is unclear why stablecoin deposits at the Bank of England should not be remunerated and calls for fresh consideration of that proposal. She also says the Bank and the Treasury need to provide more clarity on how they will decide when a stablecoin becomes systemic, warning that uncertainty is likely affecting potential entrants to the UK market.

Regulatory stance shifts as market opportunity grows

The report says the UK should use its position as a global financial centre to support stablecoins, which could improve cross-border payments, help preserve monetary sovereignty and create new business opportunities.

One proposal that receives support is the Bank of England’s plan to backstop stablecoins by lending to issuers during a crisis. But the inquiry says a requirement for systemic issuers to hold unremunerated deposits at the central bank makes the UK less attractive than rival markets.

There are signs that regulators are already softening some of the most disputed measures. Sarah Breeden, the Bank of England’s deputy governor for financial stability, told the Financial Times last month that the central bank may have been overly conservative and is reviewing whether it can address the risks in other ways as stablecoins enter wider use.

The committee also warns that illicit finance remains a significant risk, particularly through unhosted wallets that allow users to hold stablecoins outside regulated intermediaries. Noakes says the challenge is to strike the right balance between preventing abuse and allowing innovation to develop.

In our earlier article on the UK’s emerging stablecoin rulebook, we noted that a cross-party House of Lords committee urged the Bank of England to take a less prescriptive, principles-based approach. It highlighted concerns over proposed caps on stablecoin holdings and the idea of requiring issuers to keep non-interest-bearing reserves, arguing the regime should adapt as the still-nascent sterling stablecoin market develops.

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