Today Innovate Finance and the Digital Pound Foundation published a report outlining the urgency for stablecoin regulations in the UK and the potential opportunity given the UK’s role in foreign exchange markets. The market for offshore dollars is referred to as the Eurodollar market, and the associations envision the UK playing a similar role for stablecoins. Innovate Finance represents the fintech sector in the UK.
“Without decisive and urgent action, the UK risks missing a significant window of opportunity,” said Janine Hirt, CEO of Innovate Finance. “As the fourth most traded currency globally and home to nearly 40% of FX turnover, GBP is a natural anchor for global stablecoins. It’s not unrealistic to suggest the UK could capture 10–20% of this market. Despite other jurisdictions moving earlier, the UK has the advantage of learning from their gaps.”
There were plans for UK stablecoin regulations to be in place by now. While both the Conservatives and Labour are supportive of stablecoins, the change of government last year resulted in a legislative roadmap review. Rather than introducing legislation piecemeal, the Labour government plans to introduce comprehensive laws for the crypto sector in 2026. Another round of stablecoin consultation is due this quarter.
Today’s joint report makes some useful suggestions, but also some provocative ones.
Consistent with foreign regulations, but offer interest
The report recommends UK legislation be in line with international regulations. While there is some commonality worldwide, there are also very significant differences. At the same time, the paper proposes allowing stablecoin issuers to allow identified stablecoin holders to directly earn interest, something that most international stablecoin legislation does not support.
Learn from the EU’s MiCA regulations
Some fintechs view Europe’s MiCA regulations as restrictive. Europe chose to require a large proportion of stablecoin reserves to be held in commercial bank deposits – 30% for smaller stablecoins and 60% for larger ones. The Innovate Finance / Digital Pound Foundation report is not keen on such high deposit requirements. However, in a 2023 discussion paper the UK’s Financial Conduct Authority (FCA) did not propose having limits.
On the other hand, the 2023 plans would assign oversight of systemic stablecoins to the Bank of England, which outlined different requirements. For these large stablecoins, all reserves would be held at the central bank, making them safe. However, the stablecoin issuer would not earn any interest, undermining a key business model. The report notes this two track regime for stablecoins creates a cliff effect and could cap stablecoin issuance in the UK. It’s also quite different from regulations elsewhere.
Another EU rule that the report’s authors want to sidestep is the requirement for direct redemption by the issuer.
Europe also requires foreign currency stablecoins used within the EU be issued in the EU according to MiCA regulations. It potentially creates some international fungibility issues (frictions in cross border exchanges), which we plan to publish an article on shortly. Hence, the report suggests the UK should support foreign issued stablecoins, without requiring them to comply with UK legislation.
Stablecoin startups could use tokenized collateral
The 2023 FCA discussions considered a variety of reserve assets including money market funds (MMFs), and concluded that only short term Treasuries and bank balances were appropriate. By contrast, the report suggests a wider range of assets, including MMFs, Bank of England deposits and reverse repos. It also has a particularly useful suggestion about new stablecoin startups: they should be allowed to use tokenized collateral.
This makes considerable sense because it would encourage more stablecoin startups. It’s relatively quick to spin up a stablecoin if the primary requirement is to buy tokenized collateral to use as reserves, although the GBP choice of tokenized assets is narrower than for US dollars. Using tokenized collateral allows startups to initially focus on getting traction.
Draft stablecoin legislation in the United States includes support for tokenized collateral. For larger stablecoins, this potentially introduces additional risks with collateral held via a third party rather than a large bank providing custody for Treasuries. For example, questions on tokenization include: who is doing the tokenization? How are they regulated? And does the underlying collateral definitely exist without other claims against it?
Central bank limits on wholesale usage
The report’s author was critical of regulators considering stablecoins in the context of existing infrastructures and other innovations such as central bank digital currency and tokenized deposits. The impression given was that this approach is slowing progress. But surely there would be some dereliction of duty if regulators didn’t consider these factors?
There was also criticism of the Bank of England imposing holding limits for systemic payment platforms using stablecoins. In a paper last year, the central bank noted the need to “mitigate financial stability risks stemming from large and rapid outflows of deposits from the banking sector, which could threaten the singleness of money.”
In the United States, Silvergate Bank suffered from rapid outflows following the crypto crash. However, until the recent change of administration in the US, the strategy appeared to be zero risk tolerance, which effectively blocked innovation. So far, the pendulum in the US appears to have swung quite far in the opposite direction. It remains to be seen how the support of innovation will be balanced with potential risks in the UK.
A key takeaway from the report is that the current momentum in stablecoins adds greater urgency for UK stablecoin regulation. At the same time, being a late mover gives the UK the opportunity to see what works elsewhere.