The UK House of Lords Financial Services Regulation Committee has expressed concerns that current regulatory proposals for stablecoins may impede market growth, putting the United Kingdom at a disadvantage compared to the United States and the European Union. The committee has called for revisions to rules set forth by the Bank of England and the Financial Conduct Authority (FCA), arguing that certain provisions are not adequately calibrated to foster a competitive environment.
Key Takeaways
- The UK House of Lords Financial Services Regulation Committee has identified specific stablecoin regulations that could hinder market development.
- Recommendations include reconsidering holding limits, requirements for unremunerated backing assets, and restrictions on commercial bank involvement in stablecoin issuance.
- The FCA’s k-factor capital requirement, which scales with issuance volume rather than risk, is also under scrutiny.
- The committee emphasizes the need for clarity on systemic designation criteria for stablecoins and the assessment of existing frameworks for combating illicit finance.
- The report highlights the significant dominance of USD-denominated stablecoins in the global market and the nascent state of UK-issued stablecoins.
While generally supportive of the proposed framework for regulating systemic and non-systemic sterling stablecoins, the committee’s report, titled “Stablecoins: waiting for regulation,” highlighted specific elements that could prove detrimental. The report urges a more flexible and risk-proportionate approach to encourage innovation within the sector.
Reassessing Backing Assets and Holding Limits
A primary area of criticism targeted the Bank of England’s proposal requiring systemic sterling stablecoin issuers to maintain at least 40% of their backing assets in unremunerated central bank deposits. The Lords committee has recommended that the BoE conduct more detailed modeling of these requirements. Furthermore, they suggested reconsidering whether these deposits should be remunerated at the base rate and advocated for a more principles-based approach to the overall composition of backing assets, rather than a prescriptive one.
Regarding proposed holding limits—set at £20,000 for individuals and £10 million for businesses—the committee advised against their pre-emptive implementation. The report suggests that such limits should only be considered if market growth clearly indicates risks to financial stability, citing concerns that the caps could be commercially damaging and difficult to enforce. The report also noted that no other jurisdiction currently imposes similar holding limits.
Restrictions on Banks and Capital Requirements
The committee also addressed the restrictions placed on commercial banks wishing to issue stablecoins. Current requirements by the Prudential Regulation Authority (PRA), which mandate that stablecoin issuance be conducted by insolvency-remote entities under separate branding, were deemed unduly restrictive. Despite the PRA reaffirming this stance in a recent Dear CEO letter, the committee maintained that these requirements should be revised.
In relation to capital requirements, the FCA was urged to re-evaluate its k-factor prudential requirement. This requirement scales with the volume of stablecoins in circulation rather than the associated risks, leading the committee to question its appropriateness for determining issuers’ capital needs.
Clarifying Illicit Finance and Systemic Designation
HM Treasury has been asked to provide greater clarity on the criteria for determining when a stablecoin qualifies as systemic. The committee recommended the publication of quantitative thresholds to offer issuers greater certainty for planning purposes.
A joint assessment by HM Treasury, the FCA, and the BoE was called for to determine if existing legal frameworks are adequate for detecting and deterring illicit activities through private, unhosted wallets. The report suggested that legislation to restrict the use of such wallets should be prepared if necessary.
The report noted that the global stablecoin market, valued at approximately $315 billion as of 2026, is overwhelmingly dominated by U.S. dollar stablecoins, with Tether and Circle accounting for about 90% of the market. In contrast, the only UK-issued fiat-referenced stablecoin, tokenized GBP (tGBP), had a market capitalization of $1.53 million as of March 2026. The FCA’s comprehensive cryptoasset regime is anticipated to take effect on October 25, 2027.
Baroness Noakes DBE, chair of the committee, stated, “The global stablecoin market is dominated by U.S. dollar stablecoins and evolved to serve crypto asset 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.”
Potential Regulatory Precedent
The recommendations from the House of Lords committee suggest a potential shift towards a more market-led and less prescriptive regulatory approach for stablecoins in the UK. By urging the Bank of England and the FCA to reconsider holding limits, backing asset requirements, and capital rules that scale with volume, the committee is signaling a desire for regulations that prioritize innovation and competitiveness. If adopted, these changes could establish a precedent for other jurisdictions seeking to balance financial stability with the growth of the digital asset market. The emphasis on publishing clear quantitative thresholds for systemic designation also points towards a move for greater regulatory certainty, which is crucial for market participants.
Information compiled from materials : www.theblock.co