UK stablecoin rules are facing growing scrutiny after a House of Lords committee warned that overly restrictive regulations could slow the development of sterling-backed digital assets.
The committee urged regulators to strike a balance between financial stability and innovation as the country works toward a comprehensive stablecoin framework.
It also cautioned that delays or excessive restrictions could leave the United Kingdom trailing behind other major markets.
The recommendations come as UK authorities move closer to finalizing stablecoin regulations expected before the end of the year. Lawmakers said the current approach should support innovation while maintaining safeguards for consumers and the wider financial system.
Committee Raises Concerns Over Proposed Restrictions
The House of Lords committee largely supports the regulatory plans outlined by the Bank of England and the Financial Conduct Authority. However, it warned that certain measures could weaken the business case for firms seeking to issue stablecoins in the UK.
One major concern involves a proposal requiring stablecoin issuers to hold 40% of backing assets in non-interest-bearing deposits at the Bank of England. The committee argued that this requirement could reduce profitability and make UK-issued stablecoins less competitive in global markets.
Lawmakers also questioned temporary limits on user holdings of stablecoins. They said such restrictions could hinder growth in the emerging sterling-backed stablecoin sector while proving difficult to enforce in practice.
The committee stated that regulators should recognize that the stablecoin market remains in its early stages and adapt rules as the sector evolves. It also supported maintaining one-to-one reserves backed by high-quality assets and backed the creation of a liquidity facility for systemic stablecoin providers.
Regulators Urged to Support Market Development
The report highlighted that dollar-pegged stablecoins continue to dominate the global market while sterling-backed alternatives remain limited. According to the committee, the absence of a complete regulatory framework has slowed domestic stablecoin development and restricted funding opportunities in the UK market.
Lawmakers also called for further assessment of risks associated with unhosted wallets. They asked HM Treasury, the Bank of England, and the FCA to review whether existing regulations adequately address those concerns.
The committee favored a principles-based approach that allows stablecoins to serve multiple use cases without unnecessary restrictions. It also advised regulators against treating stablecoins as inherently more risky than existing payment systems such as bank transfers and card networks.
UK Pressed to Keep Pace With Global Competitors
The House of Lords warned that slow implementation of stablecoin rules could allow the United States and the European Union to strengthen their lead in digital payments innovation.
The report noted that regulatory delays may limit opportunities for British challenger banks and smaller businesses seeking access to modern payment networks.
Committee chair Sheila Noakes said the UK has fallen behind international peers but is now moving in the right direction. She stressed the need for a framework that encourages innovation while managing risks effectively.
The Bank of England is expected to publish its final draft rules for systemic stablecoins later this month as policymakers continue shaping the future of digital payments in the country.
