U.K. Stablecoin Inquiry Launches Critical Review of Proposed Regulations Amid Global Competition

LONDON, January 30, 2026 – The U.K. Parliament has initiated a formal stablecoin inquiry, marking a pivotal moment in the nation’s approach to cryptocurrency regulation. This parliamentary probe will critically examine proposed frameworks for Sterling-backed digital assets. Consequently, it addresses growing concerns about the competitiveness of British offerings in a market overwhelmingly dominated by the United States. The House of Lords Financial Services Regulation Committee (FSRC) officially called for evidence submissions on January 29. This inquiry represents a strategic effort to balance innovation with financial stability. Ultimately, the findings will shape final rules expected by year’s end.

Scope and Objectives of the Parliamentary Stablecoin Inquiry

The House of Lords FSRC inquiry possesses a broad and detailed mandate. Primarily, it will assess the projected growth and adoption of stablecoins within the U.K. economy. Furthermore, the committee will analyze both the opportunities and systemic risks presented by this emerging sector. A key focus involves evaluating the potential impact on monetary policy control and broader economic stability. The inquiry will specifically investigate the global competitiveness of Sterling-backed stablecoins. Baroness Sheila Valerie Noakes DBE, Chair of the FSRC, emphasized the probe’s comprehensive nature. She stated the inquiry would “assess whether the Bank of England and FCA’s proposed regulatory frameworks provide measured and proportionate responses.”

Evidence submissions from experts and industry participants will run until March 11, 2026. This timeline aligns with the government’s goal to finalize a regulatory regime for the sector in 2026. The process underscores a legislative desire for thorough consultation before enacting binding rules. This approach aims to avoid overly restrictive measures that could stifle innovation. Simultaneously, it seeks to implement necessary guardrails for consumer protection.

Examining the Bank of England’s Proposed Regulatory Framework

In late 2025, the Bank of England (BoE) and the Financial Conduct Authority (FCA) published their joint proposal for Sterling-backed stablecoin regulation. This framework introduced several foundational requirements for issuers. A central pillar is the **60/40 reserve asset formula**. Under this rule, issuers must back their stablecoins with high-quality, liquid assets. Specifically, 60% of reserves can be held in short-term U.K. government bonds. This portion may earn interest for the issuer. The remaining 40% must be held as deposits at the Bank of England. These central bank reserves will not accrue interest.

The regulators also proposed strict holding limits to mitigate financial stability risks. The draft rules suggest a £20,000 cap per individual and a £10 million cap per business entity. These caps directly address concerns from traditional banks about potential deposit flight. The fear is that large-scale migration of bank deposits to interest-bearing stablecoins could reduce credit availability in the broader economy. The BoE’s proposal appears as a cautious, stability-first approach. It contrasts sharply with more permissive regimes developing elsewhere.

Market Context and the Challenge of U.S. Dominance

The urgency of the U.K. inquiry is magnified by the current global stablecoin landscape. Data from analytics platform Artemis reveals a stark market reality. The total stablecoin supply now exceeds $306 billion. U.S. dollar-denominated stablecoins command approximately 99% of this market. Euro-based stablecoins hold a minor share. Sterling-backed offerings, however, occupy a negligible position. They currently rank 10th by market capitalization, representing just $261,000 in total supply. This equates to less than 0.1% global market share.

This extreme dominance presents a significant challenge for any new regulatory framework. Regulations perceived as too stringent could further hinder the adoption of GBP stablecoins. Conversely, overly lax rules might introduce unacceptable risks to the U.K. financial system. The parliamentary inquiry must navigate this complex trade-off. Its recommendations will need to foster a competitive environment for British innovation. At the same time, they must ensure robust consumer protection and systemic safety.

Industry Criticism and the Competitiveness Debate

The BoE’s proposed rules have faced pointed criticism from within the cryptocurrency and decentralized finance (DeFi) sector. Prominent figures argue the regulations could render GBP stablecoins fundamentally uncompetitive. Stani Kulechov, founder of the Aave protocol, publicly criticized the proposals. He highlighted the dual constraints of the holding caps and the limits on interest-earning potential. Kulechov and other critics contend that these rules disincentivize both users and issuers.

The debate centers on a direct comparison with the evolving U.S. regulatory approach. Draft rules from American regulators, while still under development, currently lack user holding caps. They also generally permit issuers to earn interest on a broader range of reserve assets. This potential regulatory asymmetry is a core concern for the U.K. inquiry. If British rules are significantly more restrictive, capital and talent may flow to jurisdictions with more favorable regimes. The committee must therefore determine if the proposed 60/40 split and caps are proportionate. They must assess whether these measures effectively balance risk management with the need for a viable digital Pound.

The Core Regulatory Dilemma: Stability vs. Innovation

The parliamentary inquiry grapples with a classic financial policy dilemma. On one side, regulators must safeguard monetary sovereignty and banking sector stability. The threat of deposit flight is not theoretical. High-yield, easy-access stablecoins could attract substantial capital from traditional bank savings accounts. This could increase funding costs for banks and potentially constrain lending to businesses and households. The BoE’s caps and reserve requirements are designed as pre-emptive tools against this risk.

On the other side, the U.K. government has repeatedly stated its ambition to become a global hub for cryptocurrency and blockchain innovation. Overly cautious regulation could stifle this ambition before it gains momentum. The inquiry will likely examine hybrid models or phased implementations. For example, caps could be initially low and reviewed periodically as the market develops. Similarly, the interest-earning portion of reserves could be adjusted based on observed financial stability impacts. The committee’s evidence sessions will be crucial for modeling these various scenarios.

Broader Implications for the U.K. Economy and Digital Finance

The outcome of this inquiry extends beyond the cryptocurrency sector. It will influence the U.K.’s position in the future of digital finance. Well-regulated Sterling stablecoins could streamline cross-border payments for British businesses. They could also provide new tools for treasury management. Furthermore, a credible digital Pound could enhance the currency’s international role in a digital age. The inquiry will assess these potential macroeconomic benefits.

Additionally, the probe intersects with wider discussions about Central Bank Digital Currencies (CBDCs). While the BoE continues research on a digital Pound CBDC, regulated private-sector stablecoins could serve as a complementary system. The inquiry may explore how both can coexist within a resilient financial ecosystem. The regulatory clarity provided by this process could also attract investment. Firms seeking a predictable regulatory environment may choose to establish operations in the U.K.

Conclusion

The U.K. Parliament’s stablecoin inquiry is a decisive step in shaping the nation’s digital asset future. This comprehensive probe will evaluate the Bank of England’s proposed regulatory framework for Sterling-backed stablecoins. It must carefully weigh financial stability risks against the imperative for international competitiveness. With the U.S. commanding 99% of the market, the design of U.K. rules will significantly influence whether GBP stablecoins can gain meaningful traction. The evidence gathered until March 11 will provide critical insights. Ultimately, the committee’s recommendations will determine if the U.K. can establish a secure, innovative, and competitive stablecoin sector. The final regulations, expected by late 2026, will have lasting implications for the country’s financial technology landscape and its role in the global digital economy.

FAQs

Q1: What is the U.K. Parliament’s stablecoin inquiry?
The inquiry is a formal investigation launched by the House of Lords Financial Services Regulation Committee. It aims to gather evidence and assess the proposed regulatory framework for Sterling-backed stablecoins, focusing on their growth, risks, opportunities, and competitiveness.

Q2: What are the key proposals from the Bank of England?
The BoE’s draft rules require a 60/40 reserve split, where 60% can be in short-term U.K. gilts (earning interest) and 40% must be held at the BoE (non-interest bearing). It also proposes holding caps of £20,000 for individuals and £10 million for businesses.

Q3: Why are the proposed rules controversial?
Critics, including some crypto industry leaders, argue the holding caps and limits on interest-earning reserves will make GBP stablecoins uncompetitive compared to U.S. dollar options, which may operate under less restrictive proposed rules.

Q4: How significant is the U.S. dominance in the stablecoin market?
Extremely significant. U.S. dollar stablecoins represent about 99% of the total $306+ billion market. Sterling-based stablecoins currently have a market share of less than 0.1%, highlighting the competitive challenge.

Q5: What is the main financial stability concern behind the regulations?
The primary concern is “deposit flight”—where large amounts of money move from traditional bank savings accounts into interest-bearing stablecoins. This could reduce banks’ capacity to lend, potentially impacting the broader economy.