Stablecoin as Digital Currency: The Regulatory Dilemma Faced by the UK

The UK government is now faced with a crucial question about the role of stablecoins in the modern financial ecosystem. As financial technology advances, these blockchain-based digital currencies are attracting serious attention from regulators, especially regarding how these instruments could impact traditional payment systems and the stability of established currencies. The UK House of Lords recently held an in-depth investigative session on the future regulation of stablecoins, involving experts and stakeholders to understand their long-term implications for the financial sector and the British pound specifically.

Why Digital Currency Regulation Has Become a Strategic Priority

The Financial Services Regulation Committee has opened a comprehensive dialogue about the future of stablecoins within the UK payment infrastructure. This investigation covers a broad range of issues, from competition with conventional banking systems and cross-border transaction applications to potential misuse for illegal financial activities. The Bank of England has taken a firm stance by proposing a regulatory framework that treats stablecoins similarly to traditional currencies, with strong backing requirements and adequate liquidity reserves.

Insights from leading economist Chris Giles of the Financial Times reflect a realistic skepticism about widespread stablecoin adoption in the UK. According to Giles, the main barriers are the lack of transparent legal foundations and clear regulatory frameworks for these currencies. Without proper legal protections, the risks for households holding stablecoins as liquid assets are significant. However, Giles acknowledges that with a robust regulatory architecture, stablecoins could improve payment transaction efficiency, reduce transfer costs, and accelerate cross-border and large-scale corporate transactions.

In the domestic UK market, Giles doubts that stablecoins, particularly sterling-based ones, will have a serious disruptive impact on the banking industry. The existing instant payment systems and low transaction costs within the local banking infrastructure make stablecoins less attractive as revolutionary alternatives. In his analysis, Giles sees stablecoins more as facilitative media—primarily serving as entry and exit points to the crypto asset ecosystem rather than revolutionizing the currency landscape or financial system fundamentally.

The same complex issue applies to the question of yields or interest on stablecoins. Giles emphasizes that whether stablecoins should offer yields is central to their identity and will reshape the UK financial ecosystem. If stablecoins function solely as a payment tool, there is no economic ratio to pay interest, given that interest-bearing checking products do not dominate the modern UK financial system.

Two Opposing Views on the Future of Stablecoins in Payment Systems

Contrasting perspectives come from Arthur E. Wilmarth Jr., a law professor from the United States, who adopts a more critical stance toward regulatory approaches. Wilmarth sharply criticizes the US GENIUS Act (Guidance for New Innovation for Stablecoin in the United States), calling it a “terrible mistake” because it opens the door for non-banking entities to issue stablecoins denominated in major currencies like the dollar.

In his view, a wiser approach would be to develop tokenized deposits through existing banking institutions rather than allowing fintech companies with minimal oversight to enter the “currency business.” Wilmarth sees stablecoins as a form of regulatory arbitrage—where companies under light regulation can evade the strict requirements that have been built over centuries within the global prudential banking system.

Although Wilmarth admits that the US has made some less-than-ideal financial policy choices, he praises the Bank of England’s efforts to propose a more stringent and measured stablecoin regulatory regime. The UK’s approach demonstrates awareness of systemic risks if blockchain technology is allowed to develop unchecked without adequate currency protections and payment system integrity.

Lessons from Global Challenges in Digital Currency Regulation

Both perspectives reveal a fundamental dilemma faced by regulators worldwide: how to balance financial innovation with stability and consumer protection. Giles emphasizes the need for tighter international oversight of cryptocurrency exchanges and the implementation of comprehensive Know Your Customer (KYC) and Anti-Money Laundering (AML) standards. This reflects concerns that stablecoins could easily become channels for illicit financial activities if not carefully managed.

The Bank of England has responded by proposing high standards for stablecoin issuers, requiring full backing and high liquidity for each token issued. This approach essentially places digital currencies on par with conventional financial instruments in terms of oversight and responsibility.

As the world continues to explore how to integrate blockchain technology into formal financial systems, the UK’s experience and ongoing discussions offer important lessons. The challenge is not merely about technology but about how to regulate and protect the integrity of currencies and payment systems amid rapid digital transformation. Stablecoin regulation will remain a central topic in shaping the future of global currencies and finance.