Stablecoin Regulation Faces Critical Scrutiny: UK Lords Hear Warnings Against ‘Future Money’ Claims

LONDON, UK – In a pivotal hearing that could shape the nation’s financial future, the United Kingdom’s House of Lords delivered a sobering reality check on Wednesday, as prominent critics testified that stablecoins represent transactional tools rather than revolutionary money. The Financial Services Regulation Committee gathered evidence during its new inquiry into how these digital assets should be regulated, with witnesses challenging optimistic narratives about their potential to replace traditional currency. This session comes at a crucial moment as global jurisdictions, including the European Union with its MiCA framework and the United States with its proposed GENIUS Act, race to establish regulatory paradigms for the rapidly evolving digital asset landscape.

Stablecoin Regulation Takes Center Stage in UK Parliament

The House of Lords committee hearing marked a significant development in the UK’s approach to cryptocurrency oversight. Parliament launched this inquiry to examine stablecoins’ potential roles in payments, banking, and financial stability. Committee members specifically sought to understand how these digital tokens might compete with traditional banks, facilitate cross-border transactions, and address illicit finance risks. Witnesses provided contrasting perspectives on whether stablecoins should be treated as innovative payment technologies or as potential threats to established financial systems.

Financial Times economics commentator Chris Giles presented a measured assessment to the committee. He noted that stablecoins have not gained significant traction in the UK primarily due to the absence of clear legal frameworks and comprehensive regulation. This regulatory uncertainty, Giles explained, makes households understandably hesitant to hold stablecoins as money. He emphasized that establishing a robust regulatory regime represents an essential prerequisite for any meaningful adoption.

The Practical Reality: On-Ramps Rather Than Revolution

Giles offered a pragmatic perspective on current stablecoin usage patterns. He characterized these digital assets primarily as “on- and off-ramps” into the broader cryptocurrency ecosystem rather than as standalone monetary instruments. According to his analysis, most users employ stablecoins to transition between traditional fiat currency and more volatile cryptocurrencies rather than using them for everyday transactions. This functional reality, he suggested, limits their immediate potential to disrupt existing payment systems.

Regarding domestic payments, Giles expressed skepticism about sterling-denominated stablecoins meaningfully disintermediating traditional banks. The UK already benefits from instant, low-cost payment systems like Faster Payments, which reduce the immediate advantages stablecoins might offer for routine transactions. He described the current stablecoin landscape as “not massively interesting or going to take over the world,” emphasizing their role as access points to what he termed “intrinsically worthless” crypto assets.

Bank of England’s Evolving Regulatory Approach

The hearing revealed growing consensus around the Bank of England’s emerging regulatory philosophy. Witnesses generally welcomed the central bank’s shift toward treating stablecoins “like money” with corresponding oversight requirements. This approach would mandate strict backing rules, comprehensive resolution plans, and potentially an ultimate liquidity backstop to prevent destabilizing runs. Such measures aim to address the fundamental challenge of maintaining stability in privately issued digital currencies.

Giles highlighted the critical question of whether stablecoins should pay interest, noting that this issue goes to the heart of their purpose within the financial system. If stablecoins function purely as payment technologies, he argued, “there’s no need to pay interest.” This distinction becomes crucial because interest-bearing stablecoins could potentially disintermediate traditional bank deposits, raising systemic concerns. However, Giles noted that interest-bearing current accounts already exist without dominating the financial landscape, suggesting similar dynamics might apply to stablecoins.

Illicit Finance Concerns and Regulatory Responses

Committee discussions consistently returned to the challenge of preventing illicit finance. Giles warned that stablecoins have been described as “your new suitcases of cash” due to their potential for anonymous or pseudonymous transactions. He emphasized that robust international oversight of exchanges, coupled with strengthened Know Your Customer (KYC) and Anti-Money Laundering (AML) protocols, would become essential if stablecoins moved beyond their current niche applications. These concerns reflect broader regulatory anxieties about balancing innovation with financial integrity.

Transatlantic Regulatory Divergence: The GENIUS Act Critique

The hearing featured particularly sharp criticism of proposed US legislation from Arthur E. Wilmarth Jr., a law professor at George Washington University. Wilmarth characterized the Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act as a “terrible” and “disastrous mistake” for allowing non-bank entities to issue dollar-denominated stablecoins. He framed this approach as a form of “regulatory arbitrage” that enables lightly regulated firms to enter “the money business” while potentially undermining prudential frameworks developed over centuries within the banking system.

Wilmarth expressed fundamental disagreement with the GENIUS Act’s core philosophy, stating he had a “hard time agreeing with anything in the bill.” He contrasted the US approach with what he viewed as the Bank of England’s more robust regulatory proposal, suggesting that the UK might avoid what he characterized as “unfortunate choices” made by American policymakers. This transatlantic regulatory divergence highlights the global debate about whether stablecoins should be issued primarily by regulated banks or whether non-bank innovation should be encouraged.

Alternative Approaches: Tokenized Deposits

Beyond criticizing existing proposals, Wilmarth advocated for tokenized bank deposits as a preferable alternative to privately issued stablecoins. He argued that tokenized deposits could deliver many of the technological benefits associated with stablecoins while maintaining stronger connections to the existing regulatory framework. This perspective suggests that innovation might be better channeled through traditional financial institutions rather than through new entrants operating outside established oversight structures.

The professor’s testimony raised fundamental questions about whether stablecoins represent a “natural component of the financial system” or whether they constitute an artificial construct enabled by regulatory gaps. His skepticism reflects deeper concerns about financial stability, particularly regarding how stablecoin issuers would maintain adequate reserves and manage redemption pressures during periods of market stress.

The UK’s Strategic Position in Global Crypto Regulation

This House of Lords hearing occurs against the backdrop of the UK’s deliberate approach to cryptocurrency regulation. Unlike the European Union, which has implemented its comprehensive Markets in Crypto-Assets (MiCA) framework, the UK has pursued more incremental regulatory development. The Financial Conduct Authority has been finalizing crypto rules through a series of consultations, aiming to balance innovation with consumer protection and financial stability.

The UK’s position appears strategically cautious, with regulators seeking to learn from international experiences while developing a distinctive approach. This measured strategy aims to avoid what some witnesses characterized as the “US malaise” of regulatory uncertainty and legislative gridlock. By gathering extensive evidence before implementing comprehensive regulations, UK authorities hope to create a framework that supports innovation while addressing legitimate concerns about stability and integrity.

• Cross-border payment efficiency: Witnesses identified international transfers as a potential strength for stablecoins
• Corporate transaction applications: Large-scale business payments might benefit from stablecoin technology
• Regulatory clarity as prerequisite: Clear rules must precede widespread adoption
• Systemic risk management: Resolution mechanisms and backstops essential for stability
• International coordination: Effective oversight requires cross-border cooperation

Broader Implications for Financial Innovation

The House of Lords inquiry reflects broader tensions between technological innovation and financial stability. While stablecoins promise efficiency gains, particularly for cross-border transactions, they also introduce new risks and regulatory challenges. The UK’s approach suggests a preference for integrating innovation within existing frameworks rather than creating entirely parallel systems. This philosophy contrasts with more permissive regulatory approaches in some jurisdictions while differing from outright restrictive stances in others.

Financial technology experts note that the stablecoin debate extends beyond payment efficiency to fundamental questions about money creation and monetary sovereignty. As private entities issue currency-like instruments, central banks worldwide must determine appropriate responses. The Bank of England’s exploration of a central bank digital currency (CBDC) represents one potential response to the stablecoin phenomenon, offering state-backed digital money as an alternative to privately issued tokens.

Conclusion

The UK House of Lords hearing delivered a nuanced perspective on stablecoin regulation, challenging optimistic predictions about these digital assets replacing traditional money. Witnesses emphasized that stablecoins currently function primarily as access points to cryptocurrency markets rather than as revolutionary payment instruments. The session highlighted growing consensus around the Bank of England’s approach to treating stablecoins “like money” with corresponding oversight, while delivering sharp criticism of the US GENIUS Act for potentially allowing regulatory arbitrage. As global jurisdictions develop divergent regulatory frameworks, the UK appears positioned to pursue a middle path that encourages innovation while maintaining strong protections for financial stability and integrity. The stablecoin regulation debate will undoubtedly continue evolving as technology advances and market practices develop, but this parliamentary hearing established important parameters for the UK’s approach to balancing innovation with prudent oversight.

FAQs

Q1: What was the main purpose of the UK House of Lords stablecoin hearing?
The Financial Services Regulation Committee gathered evidence for its inquiry into how stablecoins should be regulated in the UK, examining their potential roles in payments, banking, and financial stability while considering appropriate oversight frameworks.

Q2: Why did witnesses argue that stablecoins are not “future money”?
Critics noted that stablecoins currently function primarily as “on- and off-ramps” between traditional currency and cryptocurrencies rather than as widely adopted payment instruments, with limited advantages over existing UK payment systems for domestic transactions.

Q3: What criticisms were raised about the US GENIUS Act?
Witnesses described the GENIUS Act as a “disastrous mistake” for allowing non-bank entities to issue dollar-denominated stablecoins, characterizing this approach as regulatory arbitrage that could undermine centuries of banking system safeguards.

Q4: How does the Bank of England propose to regulate stablecoins?
The central bank is shifting toward treating stablecoins “like money” with strict backing requirements, resolution plans, and potential liquidity backstops to prevent destabilizing runs, similar to oversight applied to traditional monetary instruments.

Q5: What are the main concerns about stablecoins and illicit finance?
Critics warn that stablecoins could become “new suitcases of cash” for illicit transactions without robust international oversight of exchanges and strengthened Know Your Customer (KYC) and Anti-Money Laundering (AML) protocols.