Stablecoin under Review: London Divided on Regulation and Future

The UK House of Lords has recently raised fundamental questions about stablecoin regulation, revealing an important divide among experts regarding their actual role in the financial system. According to reports from Cointelegraph, experts heard in Parliament generally agree that stablecoins primarily serve as “entry and exit ramps in the cryptocurrency market” rather than representing a revolution in the traditional monetary system.

Two Contrasting Views on the Role of Stablecoins in Payments

The Financial Services Regulatory Committee (FSRC) conducted an in-depth public inquiry, questioning witnesses on critical aspects: the competition stablecoins could pose to banks, their cross-border applications, the risks related to illicit financing, and the legal framework proposed by the US GENIUS Act. The session highlighted radically different positions between two prominent figures in the international debate.

Chris Giles: Efficiency Conditional on International Caution

Chris Giles, a respected economic commentator for the Financial Times, expressed significant reservations about the adoption of stablecoins in the UK, mainly due to the lack of “clear legal foundations and a defined regulatory framework,” which makes it risky for families to consider them as true money.

Giles’s position is not entirely negative. He recognizes that with robust regulation, stablecoins could significantly improve transaction efficiency, reduce operational costs, and potentially accelerate large-scale cross-border capital transfers. However, domestically in the UK, he remains somewhat skeptical about the ability of sterling stablecoins to substantially alter the banking landscape, given the already efficient, low-cost instant payment infrastructures that characterize the current system.

A key point in his argument concerns the interest on stablecoins. Giles emphasizes that their core purpose and role within the UK financial structure depend crucially on whether these instruments need to generate yields. If stablecoins were to operate solely as value transfer technology, there would theoretically be no need to offer interest, since historically, interest-bearing bank accounts have not dominated the UK financial system.

Giles welcomes the Bank of England’s approach to treating stablecoins “as true money,” with strict collateral and liquidity requirements. However, he warns that this same approach could attract criminal uses, making international coordinated supervision of exchanges and tighter controls on KYC (Know Your Customer) and AML (Anti-Money Laundering) essential.

Arthur Wilmarth: Radical Criticism and Defense of the Banking Sector

A decidedly more critical perspective comes from Arthur E. Wilmarth Jr., a US law professor specializing in financial law, who sharply criticizes the GENIUS Act, describing it as a “disaster of proportions” for allowing entities outside the traditional banking sector to issue dollar stablecoins.

Wilmarth alternatively argues that tokenized deposits would be a better mechanism to serve the global financial ecosystem. In his reasoning, stablecoins represent a form of “regulatory arbitrage” that allows underregulated firms to penetrate the “money business,” eroding the prudential framework that the banking system has built over centuries.

The American expert strongly dissents from US legislation, acknowledging that the United States has made “many unfortunate choices” in monetary and financial policies. Despite significant criticisms, Wilmarth recognizes that the approach proposed by the Bank of England is substantially more robust and prudent.

What It Means for Stablecoin Regulation in the UK

The debate emerging from the parliamentary examination reveals that the path toward effective stablecoin regulation in the UK requires balancing two imperatives: preserving technological innovation and potential efficiencies, while simultaneously protecting the integrity of the traditional banking system and financial stability.

The Bank of England’s stance, focused on strict controls and capital requirements for stablecoins, appears to represent a compromise that addresses concerns raised by experts like Wilmarth, while leaving room for the innovations Giles envisions. The evolving regulatory framework in the UK could thus become a reference model for other jurisdictions in managing this class of digital assets responsibly.