Pounds Sterling in the spotlight: The debate over stablecoins in the United Kingdom

Stablecoins denominated in British pounds have emerged as a central topic in a recent UK House of Lords public hearing. During the session, British and American experts debated intensely about the true role of these digital currencies, their implications for financial stability, and how they should be regulated within the context of modern payment systems.

The House of Lords Financial Services Regulation Committee (FSRC) conducted a thorough review of stablecoin regulation, covering key aspects such as their competition with traditional banking institutions, their capacity to facilitate cross-border payments, the risks associated with illicit financial activities, and how they align with international regulatory proposals like the US GENIUS Act.

Experts’ views on the limited role of stablecoins in pounds sterling

Chris Giles, economic commentator for the Financial Times, offered a skeptical perspective on the transformative potential of stablecoins in pounds within the UK market. According to Giles, widespread adoption of these instruments faces a fundamental obstacle: the lack of “clear legal basis and definitive regulation” that would give households confidence to hold them as a form of money.

Despite this initial skepticism, Giles acknowledged that under a solid regulatory framework, stablecoins could improve transaction efficiency, reduce operational costs, and potentially revolutionize cross-border transfers and large-scale corporate operations.

However, domestically in the UK, Giles expressed significant reservations. He pointed out that stablecoins denominated in pounds are unlikely to displace traditional banks, given that low-cost instant payment systems already exist. This observation led him to describe stablecoins mainly as “entry and exit mechanisms into cryptocurrency ecosystems,” characterizing them as specialized tools rather than global financial revolutions.

An additional point Giles emphasized was whether stablecoins should generate yields for their holders. He argued that if they function solely as payment technology, interest is unnecessary—a parallel he drew from the fact that interest-bearing bank accounts have never dominated the UK financial system.

Robust regulation: Bank of England’s proposal versus GENIUS

Giles expressed approval of the Bank of England’s regulatory approach, which considers regulating stablecoins with standards equivalent to physical currency, including strict asset backing requirements and safety nets in case of liquidity crises. However, he warned of a latent risk: these digital currencies could become attractive for illicit financial activities, emphasizing the urgent need for coordinated international oversight, along with stricter KYC and AML procedures.

In direct contrast, American law professor Arthur E. Wilmarth Jr. issued a harsh critique of the US GENIUS Act, calling it a “catastrophic mistake.” For Wilmarth, allowing non-banking entities to issue dollar-denominated stablecoins poses a fundamental threat to the financial system.

The risk of regulatory arbitrage in stablecoin issuance

Wilmarth proposed an alternative: tokenized deposits could serve the financial system better than traditional stablecoins. His position is based on the idea that these digital currencies function as a form of “regulatory arbitrage,” giving companies with limited oversight access to the “business of money,” which could undermine decades of prudential frameworks in the banking sector.

Despite strongly disagreeing with the US proposal, Wilmarth acknowledged that the Bank of England was developing a significantly more robust regulatory regime than what GENIUS envisions. This highlights a fundamental divergence between the regulatory approaches: while the UK seeks to protect financial integrity through strict regulation of pounds-denominated stablecoins, the US proposal would allow a much more permissive regulatory architecture.