UK Lords warn BoE rules risk making pound-stablecoins obsolete

The United Kingdom should press ahead with a stablecoin regulatory regime, but the rules must avoid choking the commercial viability of a pound-denominated market. That is the central message of a new report from the House of Lords’ Financial Services Regulation Committee, issued this week. The cross‑party panel argues the UK is “lagging behind” the United States and the European Union as the gap in clarity around stablecoins persists, slowing development and investment in the UK despite the global footprint of USD-pegged tokens like USDt and USDC.

While the committee endorses much of the Bank of England’s and the Financial Conduct Authority’s proposed framework, it warns several features could undermine the competitiveness and robustness of UK-issued stablecoins. In particular, the report backs a 1:1 backing requirement for fiat-referenced stablecoins and a Bank of England backstop lending facility for systemic issuers. But it cautions that some BoE proposals announced in November 2025 could be counterproductive in practice, and could push stablecoins away from the UK market if too onerous.

Key takeaways

• The UK should regulate stablecoins with a clear regime, but calibrate rules to preserve commercial viability and competitiveness, avoiding a framework that makes GBP stablecoins unworkable.
• A 1:1 reserve backing standard is supported for fiat-backed stablecoins, alongside a BoE backstop for systemic issuers; however, the emphasised reserve mix and related constraints require careful design to avoid harming issuers’ viability.
• Proposals to hold a substantial share of backing assets in unremunerated central-bank deposits—around 40%—drew criticism and could threaten the UK’s competitive position if implemented as drafted.
• Temporary holding limits for entities and individuals, and a ban on remuneration to coinholders, are highlighted as potentially inhibiting growth and practicality, depending on how they’re implemented.
• The regime’s stance on returns—mirroring MiCA and the GENIUS Act—could affect how UK-issued stablecoins attract users, with ongoing questions about allowable non‑interest incentives and rewards.

UK regulatory trajectory: balancing oversight with market growth

The Lords committee frames stablecoins as a strategic opportunity for the UK’s payments infrastructure, not merely a question of policing risks. It notes that the current lack of a clear regime has “suppressed stablecoin development and investment in the UK,” even as institutions and consumers increasingly rely on global USD-pegged tokens. The report aligns with the Bank of England’s broader aim to mitigate financial stability risks while enabling the UK to participate in a fast-evolving payments landscape.

Crucially, the committee urges the Treasury, the BoE, and the FCA to maintain the present timelines and to provide a practical blueprint for how dual regulation will work in practice for systemic issuers. In doing so, it signals a willingness to move forward, but only if the resulting regime remains attractive to issuers and users and does not tilt the economics so heavily in favor of incumbents or foreign markets. This stance reflects a broader market dynamic: as other jurisdictions move ahead with clear rules, the UK risks losing ground if its framework becomes a barrier rather than a facilitator of innovation.

Reserves, backstops, and the practicalities of holding limits

At the heart of the debate is a design question: how should a stablecoin reserve be constituted and protected? The committee backs a 1:1 backing standard for fiat-backed stablecoins, intended to provide trust and reduce liquidity risk. It also endorses a BoE backstop lending facility to support systemic issuers in times of stress, a feature that could reassure large users and custodians about safety margins.

However, the report singles out the BoE’s proposal for requiring a substantial portion of backing assets to be held as unremunerated central-bank deposits—specifically, a 40% threshold. This element has drawn “considerable criticism” and, the committee warns, could weigh on the viability of issuers and the UK’s international competitiveness. In practice, holding a large share of reserves in non‑yielding central-bank deposits could erode issuer incentives and raise funding costs, potentially deterring issuers from choosing the UK as their base of operations.

The committee also flags potential complications from temporary holding limits that would apply to both businesses and individuals. While designed to curb risk, such limits could complicate operations and drive users toward more permissive offshore jurisdictions if not implemented with workable exemptions and robust operational frameworks. The balance, the report argues, is to prevent abuse without constraining legitimate, low-cost payments that stablecoins can provide.

Remuneration bans and what counts as a reward

Another edge of the regulatory blade concerns rewards and interest payments on stablecoin holdings. The BoE’s draft regime contemplates banning remuneration for coinholders of sterling-denominated systemic stablecoins, aligning with the EU’s MiCA framework and echoing the U.S. GENIUS Act’s stance on non-bank issuers. The aim is to limit the risk that stablecoins become investment vehicles or sources of yield rather than straightforward payment rails.

Yet the committee notes a practical tension: many users expect some form of incentive or reward for holding a stablecoin, a feature that can be crucial for adoption, especially for merchants and on-chain payments. The report raises questions about whether card-style rewards or other non-interest incentives could be permissible under the final regime. If types of non-interest rewards are allowed, they could preserve user appeal while maintaining the core risk controls; if not, there is a risk of dampening demand and slowing the growth of UK-issued tokens.

The discussion also touches on broader policy decisions: how to balance the regulatory emphasis on safety and anti‑illicit-finance measures with the need to foster a competitive, user-friendly payments ecosystem. The committee emphasizes that stablecoins should facilitate fast, low-cost transactions, not simply serve as fixed-value assets. The challenge, then, is to craft rules that preserve consumer protection and systemic integrity without turning the GBP stablecoin market into a constrained or unattractive option.

Evidence, risk, and a strategic choice for the UK

Throughout its inquiry, the Lords committee heard a spectrum of views—from industry participants to academics—about whether stablecoins can extend beyond on/off‑ramp use and into everyday payments, while maintaining financial stability, bank funding access, and consumer protections. The resulting framework, the report argues, should nurture growth in a pound-denominated stablecoin sector rather than regulate it out of relevance. That means clarifying how dual regulation will operate in practice, ensuring reserve requirements are workable, and calibrating measures like holding limits to avoid unnecessary friction in the payments system.

In essence, the committee acknowledges the high-stakes nature of the UK’s regulatory choice. A well-calibrated regime could position the UK as a globally relevant hub for GBP-denominated stablecoins, supporting faster, cheaper payments for individuals and businesses alike. Misjudgments, however, could push issuers overseas or delay the development of a domestic stablecoin market that many see as a natural extension of the country’s sophisticated financial services sector.

To the fore of the debate is a practical question: can the UK design a regime that is both credible to investors and appealing to issuers, while meeting stringent standards for risk management and consumer protection? The committee’s answer is cautiously optimistic, but contingent on a careful balancing act that preserves incentives for innovation while preventing misuse and systemic risk. The timelines referenced in the BoE consultation and the ongoing FCA guidance process will be telling, as regulators seek to align domestic rules with international norms without creating a regulatory dead zone for UK firms.

As policymakers proceed, readers should watch how the Treasury, the Bank of England, and the FCA translate these recommendations into concrete policy—particularly around the 40% reserve rule, the viability of a BoE backstop, and the scope of permissible non-interest incentives. The outcome will shape whether the United Kingdom becomes a leading jurisdiction for GBP stablecoins or remains a distant second to more clearly defined regimes elsewhere.

What comes next is a pragmatic test: can the UK harmonize safety, clarity, and competitiveness in a way that supports real‑world, low-cost payments while maintaining high standards for consumer protection and financial stability? The next few months should reveal whether the regime evolves into a practical blueprint that inspires confidence from issuers, users, and financial partners alike.