UK Lords urge Bank of England to ease 40% stablecoin rule

The UK House of Lords Financial Services Regulation Committee has warned that Britain is falling dangerously behind the United States and the European Union on stablecoin regulation, publishing a report Wednesday that calls on the Bank of England to reconsider its proposed 40% unremunerated backing asset requirement. The report, titled "Stablecoins: waiting for regulation," found that the Bank of England's draft supervisory framework would impose structural costs on stablecoin issuers that no comparable jurisdiction requires, threatening to drive pound-denominated stablecoin activity offshore. Bank of England Deputy Governor Sarah Breeden, appearing before the committee, acknowledged that the restrictions were "overly conservative" and that the central bank is reviewing alternative risk management mechanisms. With the Financial Conduct Authority's full cryptoasset regime not expected until October 25, 2027, the committee warned that London risks ceding its fintech advantage to Dublin, Paris, and New York while Brussels and Washington consolidate their positions as the world's dominant stablecoin regulatory hubs. The committee called for revised proposals as a matter of urgency and urged HM Treasury to use its powers under the Financial Services and Markets Act 2023 to direct regulators toward a more commercially viable framework before the competitive gap becomes permanent.

The 40% Unremunerated Backing Asset Requirement: Origins and Rationale

The Bank of England's proposed stablecoin regime, published in draft form in late 2025, required issuers to hold at least 40% of their backing assets in central bank deposits that yield no interest. This provision, embedded in the Bank of England's supervisory framework for systemic payment systems using stablecoins, was designed to ensure that stablecoin issuers maintain a direct, risk-free link to the central bank's balance sheet. The logic was straightforward: if a stablecoin issuer fails, the Bank of England can access those deposits immediately without relying on commercial bank resolution processes. However, the 40% floor created a structural drag on issuer profitability, effectively taxing the business model of every pound-denominated stablecoin. For an issuer managing a £1 billion reserve, £400 million would sit in zero-yield accounts, forcing the remaining £600 million to generate enough return to cover operational costs, custody fees, and compliance overhead. The Financial Services Regulation Committee of the UK House of Lords, in its report titled "Stablecoins: waiting for regulation" published on Wednesday, identified this requirement as a primary barrier to market entry. The committee argued that no other major jurisdiction imposes such a punitive reserve structure, and that the rule would drive stablecoin issuance to the United States or the European Union. The report also noted that the 40% floor was introduced without a formal cost-benefit analysis, a procedural gap that the committee said undermined the credibility of the policymaking process. Baroness Noakes DBE, a senior member of the committee, described the requirement as a textbook example of how to repel an emerging industry before it takes root.

How the 40% Rule Destroys Stablecoin Economics

A typical stablecoin issuer earns yield by investing backing assets in short-term government securities, repo agreements, and high-quality commercial paper. With the federal funds rate at 5.25% to 5.50%, a fully invested reserve generates approximately 5.00% annualized return. Under the Bank of England's proposal, 40% of that reserve earns zero, reducing the portfolio yield to roughly 3.00%, a 200-basis-point penalty. For a £10 billion stablecoin, that penalty amounts to £200 million in foregone revenue annually. The House of Lords committee calculated that this cost would either be passed to users through higher fees or would compress margins to the point where only the largest, most diversified issuers could operate profitably. The committee's report noted that Tether, Circle, and other major issuers have already indicated they would prioritize EU Markets in Crypto-Assets (MiCA) compliance over UK-specific regimes if the 40% rule remains. The economics are unambiguous: a stablecoin issuer can earn 5.00% on US Treasuries under MiCA, or 3.00% on a blended UK portfolio. The market will choose the higher yield. Bank of England Deputy Governor Sarah Breeden acknowledged this dynamic in her testimony to the committee, admitting the proposed restrictions were "overly conservative" and that the BOE is looking at different ways to manage risk. The committee concluded that the 40% unremunerated backing requirement, in its current form, would render the UK stablecoin market structurally uncompetitive and should be replaced with a risk-scaled alternative that aligns with the reserve frameworks used by the Federal Reserve and the European Central Bank.

The Competitive Reshuffle: US and EU Pull Ahead

The UK's stablecoin regulatory delay has created a clear competitive gap. The European Union's MiCA framework came into full effect in December 2024, providing a comprehensive licensing regime for stablecoin issuers across 27 member states. The United States, through the Lummis-Gillibrand Payment Stablecoin Act passed in early 2025, established a federal regulatory pathway with reserve requirements that permit investment in Treasuries and repo agreements without any unremunerated deposit mandate. The House of Lords committee explicitly warned that the UK is trailing both jurisdictions, and that the gap is widening. The Financial Conduct Authority's full cryptoasset regime, including stablecoins, is not expected to come into force until October 25, 2027, more than 18 months after MiCA's implementation and two years after the US framework. During that window, Circle's USDC and Tether's EURT and USDT will continue to dominate European and American markets, while UK-based issuers like Revolut and Blockchain.com face an uncertain regulatory timeline. The committee recommended that HM Treasury, the Bank of England, and the FCA coordinate to accelerate the timeline and align reserve requirements with international norms. Without coordinated action before the 2027 deadline, London risks losing its position as a global fintech hub to Dublin, Paris, and New York on a timeline that leaves no room for late corrections.

Downstream Effects on Hyperscalers, Banks, and Enterprise Buyers

The stablecoin regulatory uncertainty in the UK creates second-order effects that ripple through the broader financial infrastructure. Major cloud providers, including Amazon Web Services, Microsoft Azure, and Google Cloud, have built dedicated blockchain node services and managed blockchain frameworks that depend on stablecoin transaction volume for revenue. A constrained UK stablecoin market means lower transaction throughput on Ethereum, Solana, and other Layer-1 networks that process pound-denominated stablecoin transfers. For commercial banks, the House of Lords committee also flagged proposed restrictions on commercial bank involvement in stablecoin issuance, which would prevent high-street banks from issuing their own digital currencies. This blocks a potential revenue stream for Barclays, HSBC, and Lloyds at a time when their traditional fee income is under pressure from fintech competition. Enterprise buyers, including multinational corporations that use stablecoins for cross-border payroll and supplier payments, face higher costs if they must route UK transactions through EU or US-licensed issuers. The committee's report recommended that the Bank of England reconsider not only the 40% unremunerated backing requirement but also the commercial bank restrictions, arguing that a more flexible regime would encourage innovation while maintaining systemic stability.

The Policy Signal: Bank of England Admits It Overcorrected

Sarah Breeden's admission that the proposed stablecoin restrictions were "overly conservative" represents a significant policy shift for the Bank of England. The central bank, traditionally the most cautious of the major monetary authorities on digital assets, had positioned the 40% unremunerated backing requirement as a non-negotiable safeguard against runs. Breeden's testimony before the House of Lords committee indicated that the BOE is now examining alternative risk management mechanisms, including graduated reserve requirements that scale with the size and systemic importance of the stablecoin issuer, and insurance-based backstops that would not impose a zero-yield drag on reserves. The committee's report explicitly called for the Bank of England and the FCA to revise their proposals "as a matter of urgency," and recommended that HM Treasury use its powers under the Financial Services and Markets Act 2023 to direct the regulators toward a more competitive framework. The political pressure is mounting: Baroness Noakes DBE described the current regulatory trajectory as "a textbook case of how to cede a growing industry to other jurisdictions." The Bank of England's willingness to reconsider its position signals that the UK recognizes the economic cost of regulatory overreach, but the window for action is narrowing as MiCA and US frameworks solidify their market dominance.

The next six months will determine whether the UK can reclaim its position in the global stablecoin market or cede ground permanently to the US and EU. The House of Lords committee has set a clear benchmark: the Bank of England and FCA must publish revised proposals by the end of 2026, with a final regulatory framework in place no later than mid-2027. If the 40% unremunerated backing requirement is replaced with a tiered reserve structure, where smaller issuers face lighter requirements that scale upward with systemic footprint, London retains a credible bid for major stablecoin issuers seeking a diversified regulatory home. The committee cited evidence from HM Treasury consultations showing that a risk-proportionate framework preserves financial stability objectives while reducing the revenue penalty to between 50 and 80 basis points, a cost that issuers absorb without restructuring their business models or repricing end-user transaction fees. Industry respondents told the committee that a tiered approach, combined with a clarified FCA licensing pathway and removal of the commercial bank restrictions, would position the UK as an attractive secondary domicile alongside MiCA-compliant EU entities, capturing cross-border issuers who need regulatory diversity across jurisdictions. If the Bank of England maintains its conservative approach, the UK will become a regulatory outlier, forcing issuers to choose between MiCA compliance in Europe and the US federal framework. The October 25, 2027 deadline for the FCA's full cryptoasset regime looms large, but the market will not wait. Tether, Circle, and emerging issuers are already making jurisdiction decisions based on the current regulatory trajectory, and those decisions will lock in for years. The Bank of England's next move will signal whether the UK intends to compete in digital finance or retreat to a posture that prioritizes risk avoidance over market growth.