The United Kingdom is at a critical crossroads when it comes to the future of digital finance. While the government wants to regulate the crypto industry, a House of Lords committee has issued a stark warning: if the Bank of England pushes forward with its proposed stablecoin rules, pound sterling tokens could become commercially useless.
The cross-party Financial Services Regulation Committee recently released a report highlighting that the UK is already falling behind the United States and the European Union. The lack of a clear regulatory framework has historically suppressed investment and development on British soil, allowing US dollar-pegged tokens like USDT and USDC to dominate the global market. While the committee fully supports the idea of regulation, they fear the current proposals are too heavy-handed and could regulate the UK stablecoin market into irrelevance.
The report does back several foundational ideas presented by the Bank of England and the Financial Conduct Authority. For instance, the Lords agree that fiat-referenced stablecoins should be backed one-to-one by high-quality assets. They also support a proposed central bank backstop lending facility designed to protect systemic issuers. However, the committee argues that protecting consumers should not mean suffocating the businesses trying to build the technology.
Why Proposed Reserve and Holding Limits Are Raising Alarms
The committee’s primary concern centers on the Bank of England’s proposed reserve requirements. Under a November 2025 consultation, systemic stablecoin issuers would be forced to hold at least 40% of their backing assets in unremunerated central bank deposits. The Lords noted that this specific rule has drawn intense criticism from the industry, as it strips issuers of their ability to generate reasonable revenue on nearly half of their reserves. This could severely damage the business viability of UK stablecoin issuers and destroy their ability to compete internationally.
Another major red flag for the committee is the proposal to impose temporary holding limits on both individuals and businesses. The Lords argue that capping how many pound-backed tokens a person or company can hold is highly impractical to implement. More importantly, they believe these limits would unnecessarily stunt the natural growth and adoption of GBP stablecoins just as they are trying to gain a foothold in the global digital economy.
The overall message from the inquiry is that stablecoins should be viewed as fast, low-cost transaction tools rather than traditional investment products. If the government makes them too difficult to hold or issue, consumers and businesses will simply continue using US dollar-backed alternatives, leaving the British pound behind in the digital age.
The Problem With Banning Interest and Rewards
The politically sensitive issue of whether stablecoin holders can earn returns is also throwing a wrench into the UK’s crypto ambitions. The Bank of England’s current draft regime prohibits issuers of systemic sterling stablecoins from paying interest to their coinholders. This puts the UK in the same restrictive boat as the European Union’s MiCA framework and the US GENIUS Act, both of which severely limit or ban interest payouts on payment stablecoins.
However, the Lords warn that combining this interest ban with incredibly strict reserve rules creates a hostile environment for innovation. The industry is currently trapped in a state of uncertainty, unsure if alternative incentives—like card-style cashback or non-interest loyalty rewards—will even be legally permitted. Without a clear path to profitability or consumer incentives, companies have little reason to launch pound-pegged tokens.
After months of gathering evidence from industry leaders and academics, the committee is urging His Majesty’s Treasury, the Bank of England, and the FCA to rethink their approach. While strict rules are necessary to prevent illicit activity and protect financial stability, the government’s goal should be to nurture the pound-denominated stablecoin sector, not just police it. The Lords are calling on regulators to clarify their rules, stick to their timelines, and adjust reserve requirements so that sterling stablecoins can actually compete with other modern payment methods.
