UK MPs Press for Overhaul of Stablecoin Rules to Protect Financial Stability and Competitiveness

Lawmakers in the UK Parliament are calling on the country’s central bank to rethink its proposed regulatory approach to digital settlement assets, arguing that the current strategy could undermine Britain’s competitiveness in the fast-growing financial technology sector.

The intervention follows consultations in which regulators suggested imposing strict limits on how much digital currency individuals and businesses would be permitted to hold within the domestic market. Members of Parliament advocating a recalibration of these proposals say a more flexible framework is needed to prevent fintech firms from relocating to jurisdictions with lighter regulatory requirements. Such an outcome, they warn, would weaken the state’s ability to monitor large-scale financial flows and identify potential illicit activity. The debate marks a critical juncture in the effort to strike an effective balance between encouraging innovation in modern payment systems and preserving strong financial safeguards.

At the heart of the discussion is the proposed governance regime for stablecoins and other digital assets that could reach systemic importance. UK authorities have identified certain digital tokens as posing potential risks to the wider economy if they become widely used for payments without adequate oversight. These assets, if poorly managed, could affect the stability of the traditional banking system. One of the key supervisory tools under consideration is the introduction of caps on holdings, designed to limit public exposure to sudden price shocks or loss of confidence. However, the idea has ignited sharp debate between those who view such limits as essential for consumer protection and those who fear they could stifle innovation and push activity offshore.

From an anti-money laundering standpoint, regulators argue that holding caps help ensure transaction volumes remain within a range that existing compliance systems can effectively supervise. Rapid growth in asset volumes, particularly where transparency is limited, increases the risk that digital currencies could be used to integrate illicit funds into the financial system. The authorities’ objective is to establish a predictable and controlled environment in which every unit of digital currency is supported by secure and verifiable reserves. By doing so, they aim to remove the opacity that has plagued some of the most volatile corners of the global digital asset market. The underlying principle is that faster settlement and technological efficiency should not come at the expense of oversight or heightened exposure to financial crime.

The push for tighter and more transparent regulation is strongly influenced by the lessons of recent market failures, particularly the turmoil of 2022. That year saw the collapse of several major digital asset ecosystems, most notably the Terraform Labs project, which wiped out tens of billions of dollars in market value. The implosion was triggered by structural weaknesses in the algorithmic mechanisms supporting a widely used token, leading to a rapid loss of confidence among investors. When the token’s peg to the US dollar failed, a cascading sell-off followed, revealing that many digital assets were not backed by the liquid reserves their issuers had claimed. The episode underscored how quickly value can evaporate in loosely regulated markets and how difficult it becomes to trace funds during periods of disorder, creating opportunities for bad actors to conceal illicit activity.

In response, UK regulators have proposed stringent reserve requirements for issuers deemed to be systemically important. Under the plan, at least 60 per cent of reserves would need to be held in short-term government debt, with the remaining 40 per cent kept in non-interest-bearing accounts at the central bank. This structure is intended to ensure that backing assets are liquid, transparent, and insulated from the commercial risks of the issuer. By removing incentives to chase higher yields on reserve assets, the authorities hope to prevent the kind of risky investment strategies that contributed to past collapses. The model also provides a clear audit trail, enabling investigators to verify reserves and maintain confidence in the system even during periods of market stress.

Despite broad support for strong safeguards, a cross-party group of lawmakers has warned that overly restrictive domestic rules could have unintended consequences. They argue that if the UK framework is significantly tougher than those of other major financial centres, digital asset firms may choose to operate abroad. This, they stress, is not only an economic concern but also a regulatory one. When financial activity shifts offshore, it often moves into jurisdictions where customer due diligence and transaction reporting standards are weaker, creating blind spots for UK law enforcement and intelligence agencies. In correspondence to the Chancellor, MPs highlighted that global digital asset transaction volumes now rival those of established payment networks such as Visa and Mastercard, with more than $27 trillion flowing through these channels each year. The scale of activity, they argue, makes effective oversight essential.

To address these risks, lawmakers have urged the government to benchmark its approach against leading international frameworks, ensuring that UK rules are both robust and competitive. They contend that keeping digital asset activity within a well-regulated domestic environment is more effective in combating money laundering than forcing it beyond national borders. By maintaining engagement with the industry and setting high standards, authorities can ensure that service providers remain subject to consistent requirements for customer verification, monitoring, and the reporting of suspicious transactions.

The coming months will be critical as the government continues consultations, with the process expected to run through February 2026. Officials are gathering input from a wide range of stakeholders in an effort to design rules that can keep pace with rapidly evolving technology. The overarching aim is to integrate digital assets into the national economy without compromising consumer protection or financial stability. Central to this approach is the principle of regulatory neutrality: technologies that present similar risks should be subject to equivalent regulatory outcomes.

As the UK moves toward a more digital financial system, the central bank’s role as a guardian of stability is becoming increasingly important. The proposed regime for systemically important issuers seeks to provide protections comparable to those already in place for traditional banking, including clear legal obligations for wallet providers and guaranteed, straightforward redemption of digital assets into fiat currency. Supporters believe that, if implemented effectively, the framework could serve as a model for how a major financial centre can embrace innovation while remaining resilient against financial crime and market instability. The ongoing dialogue between lawmakers and regulators reflects a shared recognition that getting this balance right is vital to the future of the UK’s digital economy, one that aspires to be defined by transparency, reliability, and adherence to global standards.

By fLEXI tEAM