UK Lawmakers Push Back as Bank of England Faces Stablecoin Regulation Test

The Bank of England is under growing political pressure to rethink its proposed regulatory framework for stablecoins, after a cross-party House of Lords committee warned that the central bank’s approach could slow the development of a UK-based stablecoin market. Stablecoins are cryptoassets designed to maintain a steady value, usually by being pegged to a fiat currency such as the U.S. dollar or pound sterling. While the global market is still dominated by dollar-linked tokens, sterling-backed stablecoins remain tiny. That is exactly why lawmakers are concerned: if the UK imposes strict rules too early, it may prevent domestic stablecoin issuers from scaling before the market matures.

The main criticism focuses on proposed holding limits and reserve requirements. The Bank of England had previously considered limits of around £20,000 per individual and £10 million per business for sterling stablecoins used widely in everyday payments, arguing that rapid movement of deposits from commercial banks into stablecoins could threaten lending and trigger financial instability. The concern is not imaginary. If households and companies shifted large amounts of money out of bank deposits and into stablecoins, banks could have less funding available for loans, especially during periods of stress. From the Bank’s perspective, stablecoin regulation is not just about crypto innovation; it is about protecting the credit system and the trust behind money.

However, lawmakers and industry groups argue that the Bank’s proposals risk treating a very small market as if it were already systemically dangerous. The House of Lords Financial Services Regulation Committee called for a more flexible and principles-based approach, saying regulators should adapt the rules as the market develops instead of imposing heavy restrictions upfront. This is a serious point. If the rules are too restrictive, sterling stablecoins may never achieve enough liquidity, merchant acceptance, or user adoption to compete with dollar-backed tokens or overseas alternatives. That could weaken the UK’s position in digital payments, especially as the U.S. becomes more open to crypto under a more industry-friendly policy environment.

The Bank of England has already shown some willingness to adjust. Its consultation has moved away from an earlier idea that systemic stablecoin issuers should back 100% of liabilities with non-interest-bearing deposits at the Bank. The current proposal would allow issuers to hold up to 60% of backing assets in short-term sterling-denominated UK government debt, while keeping at least 40% in unremunerated central bank deposits. This adjustment is important because it gives issuers some ability to earn returns from their reserves, making the business model more viable, while still preserving a highly liquid reserve base for redemptions. The Bank is also considering alternatives to individual holding limits, including possible caps on total issuance.

The broader issue is whether the UK wants to be a cautious follower or a serious digital finance competitor. Stablecoins could support faster payments, cheaper cross-border transfers, programmable settlement, and new forms of financial infrastructure. But they also create risks around redemption, liquidity, consumer protection, and deposit flight. The UK’s challenge is to avoid both extremes: it cannot let private money-like instruments grow without safeguards, but it also cannot regulate innovation so tightly that the market moves elsewhere. The final rules expected later this year will therefore be a major signal of how the UK intends to position itself in the next phase of global digital finance.