Bank of England regulatory proposals could stifle the development of sterling-backed stablecoins, a House of Lords committee has warned, as senior officials begin playing down the importance of digital assets.
The publicly stated attitudes of UK regulators, including the BoE, have had a direct impact on the willingness of businesses to enter the market, with the UK “lagging” behind the US and the EU, the House of Lords Financial Services Regulation Committee said in a report published on Wednesday.
Regulators should ensure that they are not “inadvertently applying a more severe risk lens” to stablecoins compared with other forms of payment, the committee said.
The report’s publication comes a week after a senior bank official played down the need for stablecoins in the long run.
“I think tokenised deposits are probably going to take over from stablecoins, and five years from now, I suspect we might wonder why we were talking about stablecoins,” Megan Greene, a member of the bank’s Monetary Policy Committee, told a conference in Croatia.
Yet Lords committee chair Sheila Noakes warned that the future trajectory of the stablecoin market was unclear, and that the UK was lagging behind jurisdictions such as the US and the EU in its approach to the digital assets.
“No one knows whether or how a UK-based stablecoin market could develop,” she said.
“Regulation needs to allow innovation while ensuring that risks are effectively mitigated. The shape of any UK stablecoin market will be strongly influenced by the direction of the regulatory regime.”
In February, Revolut was selected as one of four firms to participate in the Financial Conduct Authority’s regulatory sandbox to explore how a stablecoin offering could operate under the proposed framework.
While the FCA has focused on creating a framework to enable stablecoin issuers to operate in the UK, the BoE proposals address the additional safeguards that would apply if a stablecoin became systemically important.
The House of Lords committee has urged the BoE to reconsider certain elements of the framework, “particularly in relation to holding limits, unremunerated backing assets, and restrictions on commercial banks issuing stablecoins”, Noakes said.
Regulation must also be sufficiently flexible to not “constrain use cases” or “make assumptions about the applicability of particular digital settlement solutions to use cases”, the committee said in its report.
In particular, it said the central bank should reconsider its draft requirement that stablecoin issuers should hold at least 40 per cent of backing assets in unremunerated central bank deposits.
The committee also urged the central bank not to “pre-emptively” impose holding limits, following its proposals to limit individual stablecoin ownership to £20,000 per stablecoin, with businesses able to hold up to £10mn.
The bank is expected to publish draft rules for a systemically important stablecoin regulatory framework this month.
The committee supported the development of sterling-backed stablecoins, even while acknowledging their potential risks to financial stability — flagged repeatedly by organisations such as the European Central Bank and the Bank for International Settlements — including the “possible disintermediation of the traditional banking sector”.
A sterling stablecoin could bring benefits such as fast and low-cost payment options and greater efficiency in settlements, and help avoid possible monetary policy risks arising from any “currency substitution” as a result of US dollar-denominated stablecoin adoption, the committee said.