The House of Lords Financial Services Regulation Committee has warned that the Bank of England’s proposed rules for systemic sterling stablecoins could make UK-issued tokens commercially unattractive before the market has time to develop. The concern is that financial-stability safeguards may be calibrated so tightly that sterling stablecoins lose out to dollar-denominated alternatives. The committee’s report said the UK stablecoin market remains nascent while the global market is still dominated by U.S. dollar tokens.
The dispute centers on two Bank proposals: per-coin holding limits of £20,000 for individuals and £10 million for businesses, and a reserve model requiring at least 40% of backing assets to sit in unremunerated central bank deposits. Those measures are designed to reduce run risk and bank-deposit flight, but they also compress issuer economics and limit user adoption.
Reserve Rules Become the Business-Model Problem
The Bank’s proposal would allow up to 60% of backing assets to be held in short-term sterling-denominated UK government debt, while at least 40% would remain in non-interest-bearing deposits at the central bank. That structure prioritizes liquidity over yield, but the Lords warned that the rate of remuneration and required liquidity levels could materially affect issuer viability and the UK’s international competitiveness.
The committee did not reject prudential safeguards. It welcomed 1:1 backing, statutory trust protections, audited reserves and disclosure requirements as important confidence-building measures. Its argument is about proportionality, not the absence of regulation, especially while sterling stablecoins are still trying to establish real payment use cases.
Holding limits drew similar criticism. The committee said such caps could unnecessarily inhibit GBP stablecoin growth and create practical implementation problems, particularly because the Bank presents them as temporary. Rather than imposing limits pre-emptively, the Lords urged the Bank to monitor the market and use caps only if financial-stability risks clearly warrant them.
Sterling Stablecoins Face a Competitiveness Test
For issuers, the proposed regime could raise the cost of operating in the UK. Non-yielding reserve requirements reduce revenue available for compliance, technology, audits and capital buffers, while holding caps weaken the commercial case for payment networks, treasury desks and high-value business use cases. A stablecoin that cannot scale balances or earn reserve income becomes harder to sustain.
For payments firms and treasuries, the risk is continued reliance on dollar stablecoins. The committee said a sterling stablecoin could support cross-border payments and reduce currency-substitution risks linked to the dominance of USD tokens. If domestic rules discourage GBP issuance, UK users may keep settling through dollar rails with added FX and operational friction.
The Bank has signalled some openness to revision. Deputy Governor Sarah Breeden has said the Bank is considering alternatives after industry feedback, while Reuters reported that final policy and draft rules for systemic stablecoins are expected by the end of June. The next drafting round will determine whether the UK regime supports a viable sterling market or leaves the field to better-capitalized foreign tokens.
The regulatory task is delicate. The UK needs credible redemption rights, segregated reserves and strong supervision, but it also needs rules that allow issuers to compete with card networks, tokenized deposits and offshore stablecoins. If the final framework remains too rigid, the UK may protect financial stability in theory while limiting the very market it is trying to regulate.
