Members of Parliament heard sharply contrasting evidence from leading academics on whether the Bank of England’s proposed framework risks overcorrecting for systemic threats at the expense of competition, legal clarity and cross-border efficiency.
A cross-party House of Lords committee has warned that the UK risks stifling the benefits of stablecoins through “bonkers” holding limits and an over-reliance on securities-style rules.
On February 11, leading academics urged regulators to strike a middle path between the EU’s heavy-handed MiCA regime and the US’s lighter-touch approach to unlock cheaper cross-border payments while protecting consumers from Terra-style collapses.
During the latest session of the Financial Services Regulation Committee’s inquiry into the growth and proposed regulation of stablecoins, Professors Simon Gleeson and Kern Alexander set out sharply defined views on how the UK should respond to the rapid development of digital settlement instruments.
“Regarding stablecoins [they] are not really revolutionary. They serve a function that is very similar to travellers checks,” Gleeson told peers, adding that they are “the newest incarnation” of what the payment industry has been talking about in Europe “for centuries.”
Gleeson, who is a visiting professor at University of Oxford, is a former partner at Clifford Chance, and is regarded as one of the world’s leading experts in financial services and banking regulation. While he acknowledged stablecoins “create economic benefits”, he cautioned they “pose regulatory risk… particularly for consumers.”
That framing set the tone for a session that repeatedly returned to the balance between innovation and risk — and whether the UK’s current proposals lean too far towards pre-emptive restriction.
“Absolutely bonkers” holding limits
The most pointed criticism was directed at the Bank of England’s proposed holding limits on stablecoins. Gleeson was blunt. “I mean, the holding limits strike me as being absolutely bonkers, to be honest,” he said.
The BoE has proposed a £10 million holding limit for commercial operators under its framework, and is consulting on limits for retailer users to mitigate the risks of large-scale deposit outflows.
Gleeson warned that imposing caps would amount to “writing very impactful rules to address problems that nobody knows will actually happen or not.”
He went on to argue that arbitrary thresholds risk distorting legitimate use cases, noting consumers may rationally wish to hold large balances temporarily, for example, in the context of property transactions.
“The problem you have is that if once you’ve decided to go down the route of holding limits, any limit that you choose will be the wrong limit,” he said.
The exchange underscored broader concerns that UK regulators may be designing policy around hypothetical risks rather than observable market failures.
Retail take-up: unlikely in the UK?
Despite headline growth in the US, both academics were sceptical sterling-denominated stablecoins would see widespread retail adoption in the UK.
Asked whether stablecoins would “actually take off here”, Gleeson replied: “My honest answer is probably not amongst consumers.”
Alexander, Chair of Law and Finance at the University of Zurich, suggested structural differences in payment systems matter. In the US, he noted, “settlement of payments is very costly”, and stablecoins have “attracted many 1000s and 1000s of Americans” partly for that reason.
Alexander was a Specialist Adviser to the UK Parliament’s Joint Select Committee on the Financial Services Act 2012 and was a Member of the European Parliament’s Expert Panel on Financial Services between 2009 and 2014.
By contrast, he observed that in the UK “the banking system for payments is more efficient.” “You make your payments much more quickly than you do if you’re trying to make payments in the United States,” he said.
For retail users, stablecoins are “not buying retail products”, he added, but “essentially, a gateway onto a broader alternative financial market for retail customers.” In other words, their appeal lies less in replacing contactless cards and more in providing exposure to crypto-linked or alternative assets.
Wholesale settlement the real upside
Where the witnesses saw potential was in wholesale and cross-border settlement, where Gleeson pointed to the possibility of disintermediation.
“Commercial users, financial users, don’t hold deposits because they want to hold deposits. They hold deposits as a way of enabling themselves to make payments immediately,” he said.
If firms could access a risk-free settlement asset without taking bank credit exposure, “they would unquestionably do so.”
Yet development in this space has been slower than expected. Alexander suggested incumbent banks have been cautious, partly because of regulatory uncertainty and partly because stablecoin issuance has not yet been embedded within a clear prudential framework.
Lessons from Terra
If systemic risk was debated, consumer harm was not. Alexander cited the collapse of the Terra blockchain as a cautionary example of regulatory gaps in the US.
In May 2022, the Terra blockchain was temporarily halted after the collapse of the algorithmic stablecoin TerraUSD (UST) and the cryptocurrency LUNA, an event that wiped out almost $45 billion in market capitalisation within a week. On January 21, 2024, the company filed for bankruptcy.
Alexander warned of “immediate, large-scale losses across retail and wholesale holders of stable coins because of collapses where legal rights and property and their contractual rights were not clearly defined.”
In his view, the UK must avoid similar outcomes by tightening conduct rules and promotional standards. Alexander, as a result, argued regulators should focus on three areas: clarity of contractual and property rights, insolvency treatment, and financial crime safeguards.
“The focus of the regulators ought to be on in three areas,” he said, highlighting the lack of consistent legal definitions and bankruptcy priority rules for stablecoin holders.
Scale or structure?
On financial stability, the tone was more nuanced. Alexander downplayed near-term systemic concerns, arguing regulated banks are unlikely to lose “huge amounts of deposits” to stablecoin issuers and that the greater risks lie in conduct and legal clarity.
Gleeson, however, warned that the Bank of England may be focusing on the wrong direction of risk. “If there were a run on a stablecoin issuer, you would then have a substantial impact on the government bond market,” he said, noting that issuers typically hold large quantities of short-term government paper.
He suggested that regulators must consider what happens “in the depths of a crisis” rather than only on a day-to-day prudential basis.
You can watch the full committee hearing here.
