A House of Lords committee has warned that the UK’s stablecoin regulatory framework risks being outpaced by international rivals and has called on regulators to revisit several key elements of their proposals.
The Financial Services Regulation Committee, chaired by Baroness Noakes DBE, launched its inquiry in January into the expansion of stablecoins and the regulatory frameworks proposed by the Bank of England and the Financial Conduct Authority (FCA). The resulting report sets out a series of conclusions and recommendations directed at both regulators and HM Treasury.
Among the committee’s principal findings is that the UK is currently behind the United States and the European Union in establishing a workable regulatory regime. The report stresses that regulators must stick to their existing timelines and warns against any further delays to finalising the framework.
The committee also identified several areas where the UK’s proposals diverge from international equivalents in ways it believes warrant reconsideration. These include requirements for systemic issuers to hold unremunerated backing assets, proposed limits on how much of a stablecoin individuals can hold, and restrictions preventing commercial banks from issuing stablecoins. The report calls on the Bank of England to carry out more detailed modelling of how holding limits would affect high-value use cases.
On the question of illicit finance, the committee recommended that HM Treasury work alongside the Bank of England and the FCA to assess whether existing legal tools are adequate to detect and deter illegal activity conducted through private unhosted and unregulated wallets. It further advised that the government should be willing to introduce legislation to restrict such wallets if necessary.
The report also urges HM Treasury to provide greater clarity on how it will assess whether a stablecoin should be classified as systemic, and asks the FCA to reconsider whether a k-factor capital requirement that scales with stablecoin issuance volumes is the right approach.
Baroness Noakes said: “The global stablecoin market is dominated by US dollar stablecoins and evolved to serve cryptoasset trading. New uses for stablecoins are emerging and regulators globally are setting up regulatory regimes. The UK is lagging behind compared with the US and the EU but is now moving in the right direction.
“The committee support much of what the Bank of England and Financial Conduct Authority are proposing. There are, however, elements of the proposals which should be reconsidered, particularly in relation to holding limits, unremunerated backing assets, and restrictions on commercial banks issuing stablecoins.
“No-one knows whether or how a UK-based stablecoin market could develop. Regulation needs to allow innovation while ensuring that risks are effectively mitigated. The shape of any UK stablecoin market will be strongly influenced by the direction of the regulatory regime, and so it is important that the regulators get this balance right.”
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