UK House of Lords Committee hears praise for stablecoins

The United Kingdom Parliamentary Committee on stablecoins has heard praise for stablecoins and criticism of the country’s proposed regulatory approach, including intermediation and the central bank’s suggested holding limits.

Last week, the U.K. House of Lords Financial Services Regulation Committee on stablecoins held its second hearing, receiving evidence from two expert witnesses on the growth and proposed regulation of stablecoins in the country.

The two specialists, both academics, spoke broadly in favor of stablecoins as a useful asset class for settling cross-border payments and providing competition to the leading payment providers, Visa (NASDAQ: V) and MasterCard (NASDAQ: MA).

However, they also raised some issues with the current U.K. regulatory approach proposed by the Financial Conduct Authority (FCA) and the Bank of England (BoE), particularly regarding the former’s consumer protections and the latter’s holding limit proposals.

Stablecoin inquiry

At the end of January, the House of Lords Financial Services Regulation Committee, a Lords select committee appointed to consider financial services regulation, launched an inquiry into stablecoins in the U.K., calling for evidence on their growth and proposed regulation in the country.

The Baroness Noakes DBE, Chair of the Financial Services Regulation Committee, said at the time: “We have launched this inquiry to assess the opportunities and risks that the growth of stablecoins may present for the U.K. financial services sector and the wider economy, and whether the Bank of England and FCA’s proposed regulatory frameworks provide measured and proportionate responses to these developments.”

It held its first hearing on February 4, receiving evidence from two somewhat skeptical expert witnesses—Chris Giles, economics commentator at the Financial Times, and Professor Arthur Wilmarth, Jr., Professor Emeritus of Law at George Washington University Law School—who gave largely unfavorable feedback on topics such as safety, regulation, and whether stablecoins are the future of money.

Fortunately for stablecoin advocates, this week’s witnesses painted a more positive picture of what stablecoins have to offer the economy and finance space.

Back to the top ↑

On stablecoins

In terms of stablecoins more generally, the committee’s first witness, Simon Gleeson—law Professor at the University of Oxford and a leading expert in financial services and banking regulation—argued that, legally and economically, there was nothing “new” about stablecoins, but that they fall into a regulatory grey area.

“One way of looking at stablecoin issuance is that it’s just a form of very narrow banking… the issue here is that these things are halfway between banks and funds,” said Gleeson. “The experience in South Korea with Terra-Luna demonstrates that allowing completely unregulated entities to issue things that circulate as money is potentially disastrous.”

This comment demonstrates the long shadow that the Terra (Luna) incident still casts—the notorious May 2022 collapse of the Terra (UST) stablecoin, when it lost its peg to the dollar and saw an estimated $60 billion wiped out of the digital asset space in one fell swoop—to this day causing regulators and lawmakers pause for concern when it comes to embracing the asset class.

However, Gleeson went on to suggest that stablecoins have a place in the financial system and can fill an important need.

“Stablecoins are most desperately needed is in the context of cross-border payments, because the current bank model takes forever and costs a fortune,” he said. “If it were possible to settle financial markets instantaneously by the exchange of stablecoins, that would be a major benefit to global financial stability.”

This potential benefit was backed up by the hearing’s second witness, Dr. Kern Alexander, Professor of International Banking and Financial Law at the University of Zurich, who argued that stablecoins represent a natural evolution of money and payments.

“In my view, stablecoins are not revolutionary; they serve a function similar to traveler’s cheques. The only difference is that stablecoins can be spent over the internet,” said Alexander. “They’re the newest incarnation of payments that have been taking place in Europe for centuries, so I don’t really see a challenge.”

He also praised the cost benefits that stablecoins can offer consumers, saying, “It’s cheaper to settle transactions through the blockchain.”

This positive feedback from both experts will be a welcome change for stablecoin advocates who found the Committee’s previous hearing a hard pill to swallow.

However, a common theme of both hearings was the inadequacy of current regulatory approaches, including the proposed U.K. regime.

Back to the top ↑

Intermediation problem

The FCA and BoE are currently both consulting on their approaches to stablecoin regulation; the former as part of the U.K.’s broader digital asset framework, the latter specifically for ‘systemic stablecoins.’

This impending regulation, which is expected to be finalized this year, is a major source of inspiration for the House of Lords Finance Committee’s inquiry.

Last week, the Committee heard that the U.K.’s proposed approach may be lacking in some key areas, one being intermediation—a process in which a bank or payment company acts as a middleman, moving money between people or businesses rather than having them send it directly to each other.

At this point, stablecoins would stop acting like digital cash and more closely resemble tokenized securities accounts.

Gleeson went so far as to say that “the application of securities regulation to stablecoins potentially kills stablecoins as a useful product.”

Back to the top ↑

Contrasting US and MiCA approaches

Another major topic up for discussion was which existing regulatory regimes the U.K. may want to mirror, specifically the European Union’s comprehensive Markets in Crypto Assets (MiCA) regulation or the United States’ more focused GENIUS Act.

The EU’s approach was positioned as more “heavy-handed,” in contrast to the “wild west” of the U.S.—a slightly caricatured framing of these respective approaches, as they are similar in several respects, but nonetheless a common perception.

When asked where the U.K. should position itself on this regulatory spectrum, Alexander suggested that: “The U.K. can occupy a middle road that can take advantage of having a more comprehensive regime in place that takes account of consumer protect, investor protection issues—which I would say now the U.S. system does not adequately do—but not the more burdensome, prescriptive regulations adopted by the EU.”

In this regard, he pointed to the U.K.’s digital securities sandbox as a good example of where the country is already experimenting with how best to handle new products and issuance under existing regulation.

In terms of specific consumer and investor protection pitfalls to avoid, Alexander criticized U.S. regulation for being weak on asset redemptions and maintaining the peg.

“The definition of “peg” is not clear enough, and neither is the explanation of the rights of holders to redemption—this is the same situation that led to the Terra-Luna fiasco,” he suggested. “I think that the proposals should be developed more in the area of consumer protection, market abuse and financial crime. Those are where the real regulatory risks are.”

While Gleeson echoed concerns about consumer protection, he seemed less convinced that the three regulatory approaches under discussion—the EU’s MiCA, the U.S.’s GENIUS Act, and the U.K.’s proposed regime—substantially differ in their stablecoin provisions.

“In terms of regulating the products themselves, the remarkable thing is that the GENIUS Act in the U.S., MiCA in the EU, and the proposals here, all end up in almost exactly the same place,” said Gleeson. “That’s not a million miles away from where the money market fund regulation already is. So, in that regard, it would seem that they have got that balance right.”

However, he did go on to highlight the issue of what happens to the interest on the bonds held to back the assets—currently being hotly debated in the U.S. when it comes to the GENIUS Act—which he said remains up in the air.

Back to the top ↑

Interest payments and third-party benefits

In the U.S., the GENIUS Act has recently been criticized by market participants for its ambiguity regarding whether it prohibits products that offer yield on stablecoins. A collective of organizations representing bank interests in the U.S. wrote to the Treasury last November to insist that the Act be interpreted as banning interest, much to the displeasure of stablecoin market participants, who have criticized the Act for allowing this interpretation.

According to Gleeson, the issue with stablecoins being permitted to pay interest is that the money entering the banking system would be reduced, in turn reducing the money entering the economy.

Gleeson argued that the result of this would “absolutely be a drain of credit from the real economy.”

However, Alexander was less concerned about this prospect, suggesting that: “I don’t think that by paying interest on stablecoin accounts it’s going to cause a bank run, because the money will end up coming back into the banking system.”

For example, he argued that stablecoin issuers would likely still have bank accounts and yields would eventually find their way back into these accounts.

While the EU, explicitly, and the GENIUS Act, ostensibly, both ban interest on stablecoin holding and the U.K.’s proposed approach is consistent with this, there remains a difference in position when it comes to benefits being offered by third parties, such as exchanges.

EU regulation bans these third-party benefit payments, the U.S. regulation allows them, and the current U.K. proposed framework doesn’t deal with it at all.

When asked which way the U.K. should go on this issue, Alexander said the he believed the EU regulation had got it wrong, arguing that “I think they [the UK regulators] should allow the payment of the benefits, it’s a service and it’s helping to reduce transaction costs for the parties involved, and I think Europe has gone too far in that regard.”

Back to the top ↑

Systemic stablecoins

The other major discussion point of the hearing related to the BoE’s proposals for so-called “systemic stablecoins”—stablecoins considered large or significant enough to potentially pose a threat to the broader financial system if they collapsed.

The Committee questioned the witnesses about backing assets and holding limits. On the latter, Gleeson didn’t mince words, describing the BoE’s proposed limits as “bonkers.”

Specifically, the BoE has proposed that systemic stablecoin issuers implement per-coin holding limits of £20,000 ($27,315) for individuals and £10 million ($13.6 million) for businesses, which Gleeson described as “crazy.”

The BoE has said it expects “to loosen, and ultimately remove, such limits as we gain sufficient comfort that financial stability risks have been suitably understood and mitigated.”

However, Gleeson argued that any set holding limit will be the wrong limits in any number of circumstances. Therefore, a better approach would be not to regulate for problems that may not occur, but rather to deal with them on an ad hoc basis if and when they arise.

Alexander broadly agreed, saying that he was “suspicious of all limits.” But he went even further, suggesting that the whole idea of “systemic stablecoins” is flawed.

Alexander dismissed the idea that stablecoins pose systemic risk, suggesting that this overblown concern may stem from banks being afraid of competition. He argued that, based on current stablecoins, the risks to the global economy associated with even the largest in circulation are negligible.

“Stablecoins don’t pose the same systemic risk a bank run would pose,” said Alexander.

Overall, the tenor of comments from Professors Gleeson and Alexander throughout the hearing will likely have come as music to the ears of stablecoin advocates, especially those who watched the previous session with growing trepidation that the Committee may be swayed against a U.K. embrace of the popular asset class.

Back to the top ↑

Watch: Breaking down solutions to blockchain regulation hurdles

title=”YouTube video player” frameborder=”0″ allow=”accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share” referrerpolicy=”strict-origin-when-cross-origin” allowfullscreen>