A House of Lords committee has urged the Bank of England to back stablecoins and pursue a “less prescriptive” approach to stablecoin regulation, warning that without a change in approach the UK could fall behind international partners.

The cross-party House of ‌Lords ⁠Financial Services Regulation Committee, which was established to scrutinise the UK’s financial regulation and routinely weighs in on decisions by the Bank of England, published its recommendations in a report on Wednesday.

“The Bank, [Financial Conduct Authority] and HM Treasury must recognise that the stablecoin market is nascent and growing, and adapt the regulatory regime as the market develops,” the committee wrote.

“The regulatory regime should not seek to pre-emptively address all potential future risks, and should instead be ready to address risks if and when they materialise.”

A stablecoin is a kind of cryptocurrency pegged to the value of a stable fiat currency such as the pound sterling or US dollar. According to the European Central Bank, 98% of stablecoins are pegged to the US dollar, with the euro and sterling making up a very small percentage of the market to date.

The Committee’s report was published in response to the Bank of England’s proposed stablecoin regulatory regime, which is currently under consultation. Among its proposals are plans to temporarily restrict holdings in individual stablecoins to £20,000 per person and £10 million per business and require at least 40 per cent of the reserves backing each coin to be stored with the central bank.

While it supports backstop measures, the Committee argues in the report that imposing restrictions during this nascent phase for sterling-linked stablecoins could cause the UK to drift further behind the US and EU.

“Given the early stage of the GBP stablecoin market, rather than pre-emptively impose holding limits, the Bank should consider monitoring the growth of the market and imposing holding limits only if the financial stability risks clearly warrant it,” the report suggests.

In May, its deputy governor Sarah Breeden signalled the Bank of England was looking at ways to soften these proposals, saying that stablecoins need to succeed even as the central bank manages their associated risks.

---