The UK risks falling behind on stablecoins due to excessive regulation, according to a House of Lords inquiry published Wednesday. The $310 billion stablecoin market is growing rapidly but remains dominated by US dollar coins from issuers like Tether and Circle, with less than 0.5 per cent of stablecoins denominated in pound sterling.

The House of Lords financial regulation committee found that the UK has diverged from major international jurisdictions in several key areas. Among the most contentious proposals are the plan to create two distinct regulatory regimes — one overseen by the Bank of England for systemic stablecoins and another by the Financial Conduct Authority for all others — as well as proposed ownership limits of £20,000 for individuals and £10 million for businesses, and restrictions on commercial banks launching their own stablecoins.

The Bank of England's requirement that systemic stablecoin issuers hold unremunerated deposits at the central bank has drawn particular criticism. Baroness Sheila Noakes, who chaired the inquiry, questioned why these deposits should not be remunerated and called for greater clarity on the criteria used to determine when a stablecoin is considered systemic, noting that uncertainty is discouraging potential market entrants.

There are signs that regulators may already be softening their stance. BoE Deputy Governor Sarah Breeden acknowledged last month that the central bank may have been "overly conservative" and is exploring alternative approaches to managing stablecoin risks. The Lords committee noted that publicly stated attitudes from regulators have become less hostile since 2025.

The report acknowledged stablecoins could bring significant benefits to the UK's position as a global financial centre, including more efficient cross-border payments and new business opportunities. However, it also flagged concerns about illicit use, recommending that the Treasury and regulators consider restricting "unhosted wallets" that allow actors to hold stablecoins outside regulated intermediaries.