Why Is The UK Being Warned On Stablecoin Regulation?
The UK House of Lords Financial Services Regulation Committee has warned that Britain is falling behind the U.S. and the EU on stablecoin regulation, urging the Bank of England and the Financial Conduct Authority to revise proposals that could limit market growth before the sector develops at scale.
The committee’s report, titled “Stablecoins: waiting for regulation,” broadly backed the UK’s planned framework for systemic and non-systemic sterling stablecoins. Its criticism focused on parts of the framework it said were too restrictive when compared with rival jurisdictions.
The warning comes as stablecoin policy has become a test of whether the UK can turn its digital asset ambitions into a workable market structure. The global stablecoin market stood at about $315 billion in 2026, with more than 99% denominated in U.S. dollars. Tether and Circle-issued tokens account for about 90% of the market, while the only UK-issued fiat-referenced stablecoin, tokenized GBP, had a market cap of $1.53 million as of March 2026.
That gap is central to the committee’s concern. If the UK imposes stricter rules than other major markets before sterling stablecoins reach meaningful adoption, issuers may have little reason to build in Britain. The full FCA cryptoasset regime, including stablecoins, is expected to come into force on Oct. 25, 2027.
Why Are Holding Limits And Backing Rules Controversial?
The sharpest criticism was directed at the Bank of England’s proposal requiring systemic sterling stablecoin issuers to hold at least 40% of their backing assets in unremunerated central bank deposits.
The committee said the central bank should conduct more detailed modeling of that requirement, reconsider whether deposits should be paid at the base rate, and move toward a less prescriptive, principles-based approach to backing asset composition.
The concern is commercial. If issuers must hold a large share of backing assets in deposits that earn no return, the cost of issuing sterling stablecoins rises. That could make GBP stablecoins less attractive than U.S. dollar alternatives, especially in a market where dollar tokens already dominate liquidity, trading, and payments usage.
The committee also challenged the Bank of England’s proposed holding caps of £20,000 for individuals and £10 million for businesses. It argued that the central bank should not impose those limits before the market reaches a scale that creates clear financial stability risks.
Instead, the committee recommended monitoring growth and applying limits only if risks justify them. It also noted that no other jurisdiction currently applies holding limits of this kind, raising concerns that the caps would be difficult to enforce and harmful to adoption.
Investor Takeaway
The UK’s stablecoin framework is moving forward, but the policy design may matter more than the timeline. Strict holding caps and low-yield backing rules could protect financial stability while also weakening the commercial case for sterling stablecoins.
How Could Bank And Capital Rules Affect Issuers?
The committee also criticized restrictions on commercial banks issuing stablecoins. Current Prudential Regulation Authority requirements confine stablecoin issuance to insolvency-remote entities under distinct branding. The committee called that approach unduly restrictive and said it should be revised.
The issue is whether banks should be allowed to compete directly in sterling stablecoin issuance or be forced to operate through separated structures that may reduce brand value, customer trust, and integration with existing payment services.
The FCA also came under pressure over its k-factor prudential requirement. The committee urged the regulator to reconsider whether a capital rule that scales with the volume of stablecoins in circulation, rather than the risk profile of the issuer, is an appropriate measure of capital needs.
That design could become a barrier for fast-growing issuers. If capital costs rise mechanically with issuance volume, a successful GBP stablecoin could become more expensive to scale even if its reserve structure, redemption model, and operational controls remain strong. The committee warned that such a rule could choke growth in sterling stablecoins.
What Does This Mean For UK Stablecoin Competition?
The committee’s recommendations place the UK’s stablecoin debate inside a broader competition problem. The U.S. dollar already dominates stablecoin activity, while the EU has moved ahead with a formal cryptoasset framework. Britain is trying to build a regime that protects financial stability without making sterling tokens commercially irrelevant.
The report also called on HM Treasury to clarify how a stablecoin would be classified as systemic and to publish quantitative thresholds so issuers can plan around future supervision. Without clear thresholds, firms may struggle to know when they could move from FCA oversight into the Bank of England’s systemic framework.
Illicit finance is another unresolved issue. The committee recommended that HM Treasury, the FCA, and the Bank of England assess whether existing laws are enough to detect and deter illicit activity through private unhosted wallets. It said legislation to restrict their use should be prepared if needed.
Committee chair Baroness Noakes DBE said the global stablecoin market is dominated by U.S. dollar stablecoins and developed around cryptoasset trading. “The UK is lagging behind compared with the U.S. and the EU, but is now moving in the right direction. Regulation needs to allow innovation while ensuring that risks are effectively mitigated.”
For issuers, exchanges, and payment firms, the report points to a central trade-off. The UK is giving stablecoins a place inside the regulated financial system, but the proposed rules may shape whether that market develops around sterling or continues to rely mainly on dollar tokens.
