UK Stablecoin Regulation: Critical Inquiry Launched as Bank of England Races to Finalize Systemic Rules

LONDON, UK – February 2025: The United Kingdom’s financial regulatory landscape is entering a pivotal phase as the House of Lords launches a formal inquiry into proposed stablecoin rules. This parliamentary scrutiny coincides with the Bank of England’s accelerated timeline to finalize a regulatory regime for systemic stablecoins by the end of 2026. Consequently, these parallel developments signal a decisive moment for digital currency integration into the UK’s mainstream financial system.

UK Stablecoin Regulation Enters Parliamentary Spotlight

The House of Lords Financial Services Regulation Committee formally opened its inquiry on Thursday, seeking public and expert input on regulatory proposals from the Bank of England and the Financial Conduct Authority. Baroness Noakes, chair of the committee, stated the review will assess whether these frameworks provide “measured and proportionate responses” to the evolving stablecoin market. The committee is specifically examining how these digital assets could affect traditional banking and payments. Written submissions are open until March 11, with oral evidence scheduled for a public hearing.

This inquiry represents a crucial layer of democratic oversight. It ensures the technical rules drafted by financial authorities undergo rigorous public and parliamentary examination. The move acknowledges that stablecoin regulation carries significant implications for monetary policy, consumer protection, and financial stability. Therefore, the Lords’ review adds a vital check-and-balance to the regulatory process.

The Systemic Stablecoin Framework: A 2026 Deadline

Simultaneously, the Bank of England is advancing its own regulatory agenda with notable urgency. Sasha Mills, Executive Director of Financial Market Infrastructure at the BoE, announced at the Tokenisation Summit that the central bank aims to finalize the regime for systemic stablecoins by the end of 2026. The BoE is working jointly with the FCA on this project. Mills outlined a core proposal: providing systemic stablecoins with a deposit account at the Bank of England. Authorities are also considering a liquidity facility to act as a backstop for issuers.

The proposed rules define “systemic stablecoins” as those denominated in pound sterling and used for payments within the UK, posing a potential threat to financial stability. According to a November 2025 consultation paper, these stablecoins must be fully backed, with at least 40% of reserves held as deposits at the BoE. This requirement aims to ensure robustness and parity with traditional forms of money.

Potential Impacts on Banking and Financial Stability

Central to the regulatory debate is the potential impact of widespread stablecoin adoption on the traditional banking sector. Sasha Mills highlighted a key concern: the growing use of stablecoins could reduce bank deposits. This drain, in turn, might lead to a reduction in credit provided to the “real economy”—businesses and households. Regulators are therefore walking a tightrope. They must foster innovation while safeguarding the existing credit-creation mechanisms that underpin economic growth.

The table below summarizes the core concerns and proposed regulatory mitigations:

This risk-based approach demonstrates the authorities’ intent to preempt problems before they emerge. It contrasts with more reactive regulatory models seen in other jurisdictions.

Contextualizing the UK’s Regulatory Trajectory

The stablecoin inquiry and rulemaking occur within a broader timeline of UK crypto asset regulation. The FCA recently concluded a final consultation outlining 10 core proposals for crypto markets. Full implementation of this wider framework is targeted for October 2027. Under the UK’s model, regulatory authority for crypto assets is centralized under the FCA, which acts as both the securities and commodities regulator. This creates a single-point oversight structure, unlike the bifurcated approach developing in the United States.

In the US, the proposed CLARITY Act seeks to delineate authority between the Securities and Exchange Commission and the Commodity Futures Trading Commission. The UK’s unified FCA model potentially offers clearer jurisdictional lines for market participants. However, it also concentrates significant power and responsibility within a single agency. The Lords’ inquiry will likely examine whether this centralized model is fit for purpose.

International Comparisons and Competitive Dynamics

Globally, the UK’s moves align with a wider trend of jurisdictions crafting bespoke rules for stablecoins. The European Union’s Markets in Crypto-Assets (MiCA) regulation, now being adopted by members like Moldova, provides a comparative benchmark. MiCA imposes strict reserve and licensing requirements on “asset-referenced tokens” and “e-money tokens.” The UK’s approach appears similarly rigorous but is tailored to its specific financial ecosystem, particularly the role of the Bank of England.

Key differentiators of the UK’s proposed regime include:

• Direct Central Bank Access: The requirement for systemic stablecoin issuers to hold reserves at the BoE is a distinctive feature, integrating them directly into the central bank’s balance sheet.
• Systemic Designation: The focus on “systemic” stablecoins creates a tiered regulatory system, applying the heaviest rules only to those posing stability risks.
• Joint Authority Model: The BoE and FCA’s “side-by-side” work on systemic stablecoins establishes a dual-supervisor framework for the most significant entities.

This structure aims to make the UK an attractive, yet secure, jurisdiction for responsible innovation. The government hopes it will foster growth in fintech and tokenization while maintaining sterling’s integrity.

Expert Analysis and Industry Implications

Financial technology experts note that the BoE’s 2026 deadline creates a clear runway for the industry. Projects aiming to issue pound-pegged payment stablecoins now have a defined timeline for regulatory clarity. However, the stringent requirements, especially the 40% BoE reserve rule, will significantly raise operational costs and barriers to entry. This likely favors established financial institutions over startups.

Furthermore, the inquiry’s focus on bank deposit drainage is not merely theoretical. Analysis from central bank researchers suggests that if stablecoins capture a meaningful share of retail transactions, the migration of liquid deposits out of commercial banks could be substantial. Regulators are therefore proactively designing rules to manage this transition. The potential liquidity facility for issuers, mentioned by Mills, could be a critical tool to prevent destabilizing runs during periods of stress, mirroring traditional lender-of-last-resort functions.

The path forward involves balancing multiple objectives:

• Encouraging payment innovation and competition.
• Protecting consumers and ensuring monetary sovereignty.
• Safeguarding financial stability and the banking sector’s health.
• Positioning the UK as a competitive global financial hub.

The Lords’ inquiry will play a key role in evaluating whether the proposed rules achieve this complex balance. Its call for evidence provides a critical forum for banks, tech firms, consumer groups, and academics to shape the final outcome.

Conclusion

The launch of the House of Lords inquiry into UK stablecoin regulation marks a significant step toward mature oversight of digital money. Coupled with the Bank of England’s push to finalize systemic rules by 2026, the UK is constructing a comprehensive regulatory edifice for the crypto age. This process prioritizes financial stability and integration with traditional finance, setting a high bar for market participants. The coming months of evidence gathering and policy refinement will determine the final shape of a regime that could become a global benchmark for how advanced economies manage the rise of programmable, digital currency.

FAQs

Q1: What is the House of Lords stablecoin inquiry examining?
The inquiry is assessing the regulatory proposals from the Bank of England and FCA. It focuses on whether they are proportionate, how stablecoins might affect banking and payments, and the overall risks and opportunities for the UK.

Q2: What is a “systemic stablecoin” under the proposed UK rules?
A systemic stablecoin is defined as a pound sterling-denominated digital currency used for payments in the UK that could threaten financial stability due to its scale or interconnectedness. These will face the strictest regulation.

Q3: What is the key reserve requirement for systemic stablecoins?
The Bank of England’s proposal requires systemic stablecoins to be fully backed, with a minimum of 40% of those reserves held as deposits at the Bank of England itself.

Q4: Why are regulators concerned about stablecoins and bank deposits?
Officials worry that if consumers hold significant value in stablecoins instead of bank accounts, it could reduce the deposit base that commercial banks use to create loans for the economy, potentially constricting credit.

Q5: How does the UK’s regulatory approach differ from the EU’s MiCA?
While both are comprehensive, the UK’s proposed regime uniquely mandates direct reserve holdings at the central bank for systemic stablecoins and establishes a joint BoE-FCA supervision model, tailoring the framework to its specific financial system.