UK lawmakers warn strict stablecoin rules could stifle sterling-pegged crypto growth

On Wednesday, the House of Lords committee advised the UK to pursue stablecoin oversight while ensuring they don’t choke off the pound sterling market.

In its report, it cautioned the UK risks falling behind global peers such as the United States and the European Union if its regulatory framework for stablecoins remains too restrictive.

The committee also detailed that heavy-handed requirements risk paralyzing the market’s progress. It recommended that the central bank drop its planned caps on user wallets and stop requiring issuers to hold zero-interest deposits.

Nonetheless, the House of Lords committee stressed the importance of a stablecoin framework. It explained that the current regulatory gap leaves the UK behind the US and EU, effectively freezing domestic stablecoin funding while dollar-pegged options boom internationally.

What is the House of Lords Committee opposed to?

Authorities in the UK are working toward finalizing stablecoin regulations before the end of the year, with rules expected to align closely with those in the United States.

The House of Lords Committee so far favors the bulk of the Bank of England (BoE) and the Financial Conduct Authority’s proposals, but warns that some mandates risk the business case for UK-issued tokens. 

It wrote, “The Bank, [Financial Conduct Authority] and HM Treasury ​must ​recognize that the stablecoin market is ​nascent and growing, and adapt ‌the regulatory regime as the market develops.” 

The cross-party group approves proposals for fiat-linked stablecoins to hold high-quality assets on a one-to-one basis and backs a BoE liquidity facility for systemic providers. 

However, it criticized a proposal that would force issuers to place 40% of their backing assets in non-interest-bearing Bank of England deposits, arguing that it may make it harder for firms to operate and compete globally.

It also cautioned against temporary limits on stablecoin holdings, saying they may stifle innovation in the GBP stablecoin market and be hard to enforce.

The committee also singled out unhosted wallets and called on HM Treasury, the Bank of England, and the FCA to evaluate how well current regulations address their risks. 

Earlier, the BoE had defended all its proposals as vital to prevent bank runs into digital assets. The Committee panel chair, Sheila Noakes, in response to the bank’s statement, however, called for even “a principles-based, less prescriptive approach.” 

Overall, the committee encourages a “use-case agnostic” framework that protects consumers and financial stability while allowing different stablecoin applications to develop naturally.

Additionally, peers cautioned regulators against treating stablecoins as inherently riskier than current payment methods such as card networks and bank transfers. 

Nonetheless, the BoE is expected to publish its final draft ​rules for systemic stablecoins later this month.

The committee insists on regulators maintaining their framework schedule

The House of Lords also called on regulators to stick to their regulatory timeline, arguing that slow progress could allow the US and EU to take the lead in digital payments innovation.

In its report, it warned that falling behind on regulation could leave British challenger banks and small businesses excluded from a rapidly developing global payments network. 

Noakes did not hold back in highlighting the extent to which the UK has lost ground. She commented: “The global stablecoin market is dominated by US dollar stablecoins and has evolved to serve cryptoasset trading.

New uses for stablecoins are emerging, and regulators worldwide are establishing regulatory frameworks. The UK is lagging behind compared with the US and the EU, but is now moving in the right direction.” 

She also urged that the new framework should allow for innovation while curbing the relevant risks, asking authorities to “get it right.”