UK Lords Warn Overregulation Could Undermine Sterling Stablecoins’ Competitiveness

The Bank of England has defined stablecoins as a “new form of money” that can be used for payments and settlement. The move signals a policy shift from guarding against crypto-asset risks to establishing rules for issuance, reserves and redemption. It has implications for the sterling payment system and the development of tokenized deposits, while giving banks and fintech companies clearer market direction.

By the end of 2024, the BoE plans to begin accepting regulatory applications for “systemic stablecoins” that could be widely used for payments. The Financial Conduct Authority is also supporting sterling stablecoins that meet standards for reserves, redemption and consumer protection. Digital bank Revolut, which already offers crypto-asset services, could be among the first applicants or issuers.

Stablecoins typically maintain their value through reserves of fiat-denominated assets such as the US dollar. If they become widely used for cross-border payments, rules governing reserves, redemptions and liquidity will have direct implications for financial stability. Bank of England Governor Andrew Bailey said incompatible UK and US regimes could allow risks to spread through global payment networks, making common international standards essential.

Bailey recently warned that UK and US stablecoin rules were set to face a “wrestling match.” If the United States adopts a looser unilateral framework, cross-border redemption demand and run pressure during a crisis could become concentrated in the UK. Reports did not provide a specific date for his remarks or disclose any amounts or estimated losses, but Bailey explicitly called for countries to coordinate reserve and redemption standards to prevent regulatory gaps from jeopardizing payment security.

Sterling stablecoins are digital payment instruments backed by pound-denominated assets to maintain a one-to-one value. They are central to the United Kingdom’s monetary sovereignty in cross-border payments and tokenized markets. The Bank of England proposed a regulatory framework on November 10, 2025, that would cap individual holdings at £20,000 and corporate holdings at £10 million, while requiring issuers to place 40% of reserves at the central bank without earning interest.

On March 4, 2026, Innovate Finance Chief Strategy Officer Adam Jackson told the House of Lords that the current proposal would make sterling stablecoins difficult to invest in. The group also criticized same-day redemption requirements and a ban on issuance by British commercial banks. It warned that without changes, dollar-denominated assets such as USDT and USDC could dominate digital payments in the United Kingdom, leading to “dollarisation.”

Stablecoins backed by fiat currency and high-quality government securities combine the efficiency of onchain payments with deposit-like functionality, potentially drawing deposits away from commercial banks and affecting lending. The UK House of Lords is therefore examining the regulatory approaches of the Bank of England and the Financial Conduct Authority, focusing on financial stability, redemption risks and anti-money-laundering responsibilities.

A March 4, 2026, report said the House of Lords questioned Coinbase Vice President of International Policy Tom Duff Gordon. He said regulated stablecoins are backed 1:1 by cash and high-quality government securities, redeemable at par, and subject to KYC, AML and sanctions screening. The hearing did not address transaction values. He warned that overly stringent rules, including holding limits, could leave the UK trailing the U.S. GENIUS Act and the European Union's MiCA framework.