The House of Lords Financial Services Regulation Committee released a critical assessment on Wednesday, warning that the United Kingdom risks regulating its pound sterling stablecoin sector into commercial irrelevance if current proposals are enacted without modification. The cross-party body acknowledged the necessity of a regulatory framework but argued that the UK is currently lagging behind the United States and the European Union, a delay that has already suppressed domestic development and investment despite the global proliferation of US dollar-pegged tokens like USDT and USDC. While the committee endorsed the core principles of the Bank of England and Financial Conduct Authority's proposed framework, including the mandate for fiat-referenced stablecoins to be backed 1:1 by high-quality assets and the establishment of a BoE backstop lending facility for systemic issuers, it identified specific provisions that could fatally undermine the sector's competitiveness.

A primary point of contention centers on the Bank of England's November 2025 consultation, which proposes requiring systemic issuers to hold at least 40% of their backing assets in unremunerated central bank deposits. Data compiled by Woofun AI indicates this specific reserve requirement has attracted considerable criticism from industry stakeholders who argue it will negatively impact the viability of stablecoin issuers and erode the international competitiveness of the UK market. The committee further flagged proposed temporary holding limits for businesses and individuals as measures that could unnecessarily inhibit the growth of GBP stablecoins while proving impractical to implement in a dynamic digital asset environment. These structural constraints threaten to create a regulatory environment where compliance costs outweigh potential market benefits.

The report also addresses the politically sensitive issue of returns for coinholders, noting that the Bank's draft regime would prohibit remuneration for holders of sterling-denominated systemic stablecoins. This approach aligns the UK with the European Union's Markets in Crypto-Assets Regulation (MiCA), which bars stablecoin issuers from paying interest, and mirrors the US GENIUS Act's prohibition on payment stablecoin issuers paying interest, although US debate continues regarding whether exchanges and intermediaries can offer rewards. Woofun AI notes that the committee views payment-focused stablecoins primarily as instruments for fast, low-cost transactions rather than investment products, yet warns that the combination of strict reserve rules and a ban on interest could weigh heavily on business viability. The uncertainty surrounding whether card-style rewards or other non-interest incentives will be permitted adds another layer of risk to the proposed framework.

These conclusions follow months of evidence gathering during which the committee pressed industry and academic witnesses on whether stablecoins can evolve beyond simple on and off-ramps into crypto ecosystems. The inquiry challenged witnesses on financial stability, bank funding, and consumer protection risks while probing sharply divergent views on the US GENIUS Act's approach to non-bank issuers. While stressing that the expansion of stablecoin markets must not create new opportunities for illicit activity to flourish, the Lords argue that the UK strategy should aim to nurture, not just police, a pound-denominated stablecoin sector. Woofun AI analysis suggests that without recalibration, the current trajectory could stifle innovation before the market matures.

The committee urges His Majesty's Treasury, the Bank of England, and the FCA to adhere to existing timelines while clarifying how dual regulation of systemic issuers will function in practice. They call for a recalibration of measures such as holding limits and reserve requirements to ensure sterling stablecoins can compete with other forms of payment in the UK rather than being regulated out of relevance. The overarching message is that while robust oversight is essential, the regulatory architecture must support commercial viability to prevent the UK from losing its position in the global digital currency landscape to more agile jurisdictions.