The UK’s House of Lords has raised concerns over proposed regulations governing stablecoins, warning that overly restrictive rules could weaken the country’s ability to compete in the rapidly evolving digital payments sector.
Lawmakers are urging financial authorities to revisit key aspects of the framework to ensure innovation is not stifled while maintaining financial stability.
Parliamentary Committee Reviews Central Bank Proposals
The concerns were outlined in a new report released by the House of Lords’ Financial Services Regulation Committee.
The report examined plans put forward by the Bank of England (BoE) and concluded that several measures may require adjustment to strike a better balance between safeguarding the financial system and supporting growth in the digital asset industry.
While the committee endorsed several elements of the proposed regime, including requirements for stablecoin issuers to maintain full reserves backing their tokens and access to a lending facility in emergencies, it argued that other provisions deserve closer scrutiny before being finalized.
Reserve Requirements Face Fresh Questions
One of the key areas highlighted by the committee relates to reserve management rules.
Under proposals unveiled by the Bank of England last year, issuers of systemically important stablecoins would be required to hold at least 40% of their backing assets in non-interest-bearing bank deposits.
The central bank has maintained that such measures are necessary to ensure stablecoin holders can redeem their assets reliably and to strengthen public trust in digital payment instruments.
However, peers warned that the requirement could impose significant operational and financial burdens on issuers.
According to the report, the rules could undermine the commercial viability of stablecoin businesses and reduce the attractiveness of the UK as a destination for digital finance innovation.
Concerns Raised Over Proposed Holding Limits
The committee also questioned plans to introduce temporary caps on stablecoin holdings.
The Bank of England had suggested limits ranging from £10,000 to £20,000 for individuals and up to £10 million for corporate users.
These restrictions were designed to reduce the risk of large-scale shifts of deposits away from traditional banks during periods of market stress, mirroring safeguards proposed for a future digital pound.
However, lawmakers argued that such limits could unnecessarily constrain the development of pound-backed stablecoins and may prove difficult to enforce in practice.
The report suggests regulators reconsider whether these restrictions are proportionate to the risks involved.
Regulatory Uncertainty Creates Industry Challenges
Another issue identified by the committee is the lack of clarity surrounding how regulatory oversight would evolve as stablecoin providers grow in scale.
Peers pointed to uncertainty regarding the transition from supervision under the Financial Conduct Authority (FCA) to a joint regulatory framework involving both the FCA and the Bank of England.
They also noted unanswered questions about how HM Treasury intends to classify stablecoins as systemic and bring them under broader payments regulation.
The committee believes greater transparency is needed so businesses can better understand how the regulatory landscape will operate in the future.
Warning That the UK Could Lose Ground Internationally
Lawmakers emphasized that regulation will play a decisive role in shaping the future of the UK’s stablecoin market.
They argued that authorities must ensure pound-denominated stablecoins can compete fairly with other payment methods and financial products.
The report cautioned that if the regulatory framework lacks flexibility or fails to provide sufficient certainty, the UK risks falling behind jurisdictions that have already established clearer rules for stablecoin operators and digital asset firms.
A more adaptable and innovation-friendly approach, the committee said, will be essential if Britain hopes to remain competitive in the global digital finance race.
Pressure Mounts for Policy Adjustments
The latest intervention adds to growing pressure on policymakers to soften aspects of the proposed framework.
Opposition to the rules has been building for months among industry participants and lawmakers.
In December, members of both Houses of Parliament joined peers in writing to Chancellor Rachel Reeves, urging her to resist measures they believed could hinder the government’s ambition of establishing the UK as a leading hub for digital asset innovation.
Bank of England Signals Greater Flexibility
Signs of a potential shift in regulatory thinking emerged last month when Sarah Breeden, the Bank of England’s Deputy Governor for Financial Stability, acknowledged that some earlier proposals may have been too cautious.
Breeden indicated that the central bank is open to revisiting parts of the framework and exploring ways to create conditions that allow stablecoin businesses to grow while still protecting the wider financial system.
Her comments were viewed as a signal that regulators may be willing to modify certain provisions before the final rules are introduced.
Final Rules Expected Soon
Despite calling for adjustments, the House of Lords committee stressed that regulators should avoid unnecessary delays.
It urged authorities to maintain existing implementation timelines and provide certainty to market participants as quickly as possible.
A spokesperson for the Bank of England has indicated that the institution intends to publish its final policy framework and accompanying draft rules later this month, a move that could determine the future direction of stablecoin adoption and regulation across the United Kingdom.
Industry Watches Next Steps Closely
With stablecoins increasingly viewed as a bridge between traditional finance and digital assets, the outcome of the regulatory debate is expected to have far-reaching consequences for businesses, investors, and consumers alike.
As policymakers work to balance innovation with risk management, the decisions made in the coming weeks could significantly influence whether the UK emerges as a leading center for stablecoin activity or struggles to keep pace with competitors that have already established clearer regulatory pathways.
