UK House of Lords Debates the Regulatory Underpinning for Stablecoin Frameworks

The United Kingdom’s House of Lords recently conducted a comprehensive inquiry into stablecoin regulation, revealing a fundamental debate about the legal and regulatory underpinning necessary to support these digital assets in mainstream finance. Rather than representing a revolutionary shift in monetary systems, expert testimony suggests that stablecoins function primarily as gateway mechanisms for entering and exiting cryptocurrency markets. The session, documented by Cointelegraph, brought together diverse perspectives on how authorities should approach stablecoin policy while balancing innovation, financial stability, and consumer protection.

Why Stablecoins Need Strong Legal Underpinning and Regulatory Clarity

The absence of robust regulatory underpinning emerged as a central concern throughout the House of Lords inquiry. Financial Times economics commentator Chris Giles articulated a key challenge: without clear legal underpinning and comprehensive regulation, households face significant uncertainty about holding stablecoins as a form of money. He emphasized that the current lack of definitive regulatory clarity makes sterling-denominated stablecoins particularly risky for ordinary consumers. However, Giles acknowledged that if policymakers established a solid regulatory framework with proper underpinning mechanisms, stablecoins could deliver tangible benefits—namely, improved transaction efficiency, lower transfer costs, and faster cross-border settlement for large corporate transactions. Within domestic markets, though, Giles questioned whether stablecoins would genuinely displace traditional banking services, given that the UK already operates world-class instant payment systems at minimal cost.

Chris Giles on Stablecoin Regulation: On- and Off-Ramp Gateway Model

Rather than viewing stablecoins as the future of money, Giles characterized these tokens as transition tools—serving as on- and off-ramp gateways into the broader cryptocurrency ecosystem. He downplayed their transformative potential, describing them as “not massively interesting or destined to take over the world.” His practical perspective shifted focus to the interest-bearing dimension of stablecoin offerings. Giles contended that whether stablecoins should provide yield returns connects directly to their intended purpose and the structural design of the UK’s financial architecture. If stablecoins operate purely as payment infrastructure, he reasoned, there exists no compelling rationale to offer interest payments—after all, interest-bearing deposit accounts have never dominated the financial sector. Giles expressed strong support for the Bank of England’s regulatory methodology, which treats stablecoins “like money” through strict backing requirements and robust liquidity safeguards. Yet he raised a critical warning: stablecoins, due to their pseudonymous and cross-border nature, could attract misuse by actors engaged in illicit activities. He advocated for intensified international coordination on exchange oversight and stricter Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance protocols.

Wilmarth’s Opposition to US GENIUS Act: Protecting Banking Prudence

Across the Atlantic, U.S. law professor Arthur E. Wilmarth Jr. offered a sharply different assessment, particularly regarding America’s approach to stablecoin governance. Wilmarth denounced the U.S. GENIUS Act (Guiding and Establishing National Innovation for US Stablecoins) as a “disastrous mistake,” specifically criticizing its allowance for non-bank entities to issue dollar-backed stablecoins. He argued that permitting financial firms with minimal regulatory oversight to enter “the money business” amounts to regulatory arbitrage that erodes decades of prudential banking safeguards. Wilmarth advocated instead for a tokenized deposits model that would maintain the integrity of the banking system. While he sharply disagreed with the GENIUS Act’s framework, Wilmarth did acknowledge that the Bank of England was charting a more defensible regulatory course—one that imposed genuine safeguards rather than allowing light-touch regulation to undermine financial stability.

Key Risk Factors: Illicit Finance and International Oversight

Both witnesses converged on the necessity of addressing illicit finance risks associated with stablecoins. The Financial Services Regulation Committee (FSRC) pressed witnesses on multiple dimensions: whether stablecoins pose competitive threats to traditional banking, their potential for cross-border applications, vulnerabilities to money laundering and terrorist financing, and how policymakers should evaluate emerging legislative proposals like the GENIUS Act. The discussion underscored that without stringent anti-money laundering frameworks and rigorous know-your-customer procedures, stablecoins could become vehicles for criminal financial flows. International coordination emerged as indispensable—no single nation’s regulatory underpinning can effectively contain risks when stablecoins operate across borders.

The Bank of England’s Robust Regulatory Approach

The House of Lords inquiry highlighted a strategic divergence between British and American regulatory philosophies. The Bank of England’s methodology—treating stablecoins as a form of money requiring strict backing, robust reserve management, and liquidity backstops—represents the more precautionary approach that both expert witnesses deemed more responsible. This comprehensive regulatory underpinning contrasts sharply with the American GENIUS Act’s lighter regulatory touch. The Bank of England’s framework emphasizes consumer protection and financial system stability, requiring that stablecoin issuers maintain adequate capital buffers and segregated reserves. By anchoring stablecoins to tangible assets and imposing stringent operational requirements, the Bank of England seeks to prevent the regulatory arbitrage that Wilmarth warned against. The inquiry suggests that successful stablecoin integration into financial systems depends less on technological innovation and more on the strength of the regulatory underpinning that governs their issuance, redemption, and operational conduct. As the House of Lords continues its examination, the consensus points toward the necessity of robust legal frameworks—the genuine regulatory underpinning that markets require for stablecoins to earn consumer and institutional trust while safeguarding financial stability.