Hilary Allen – Written Evidence (STA0019)

Written Submission in Response to a Call for Evidence

from the House of Lords Financial Services Regulation Committee

“Growth and Proposed Regulation of Stablecoins in the UK”

from Hilary J. Allen

Professor of Law, American University Washington College of Law

February 20, 2026

1. The market for stablecoins

• Stablecoins were developed as a relatively stable alternative to the volatility of cryptocurrencies like Bitcoin.  Their primary use case has been, and remains, as a cash management tool/source of collateral for crypto traders.  Stablecoins are also regularly used for illicit payments. Legal real-world payments have thus far been a very small use case for stablecoins.
• Only 1.9% of Americans used any form of crypto (including stablecoins) for payments in 2024, a decline from the high of 2.7% in 2022.[1]
• One analyst reported that "roughly 88% of stablecoin transaction value in 2024 was [in crypto trading]...only about 6% of stablecoin transaction value was generated through payments in 2024."[2]
• Because stablecoins serve as an adjunct to crypto speculation, stablecoin market capitalization has risen and fallen more or less in tandem with the booms and busts of the broader crypto markets through 2025 (see Figures A and B below).

Figure A: Stablecoin market capitalization (from Defi Llama):[3]

Figure B: Bitcoin-USD price:[4]

• Stablecoin markets have remained more robust in early 2026 as unbacked cryptocurrencies have lost value.

• This is likely due to institutional interest in stablecoins, particularly as a possible settlement asset for complex financial products involving tokenized real-world assets.

• There is little evidence of broad consumer demand for stablecoins as a means of payment, although it is possible that payments usage could be promoted and cross-subsidized by large technology platforms (as was expected of Facebook when it sought to launch its Libra stablecoin).  

• Stablecoins have been and remain overwhelmingly USD-denominated, which is consistent with the reality that stablecoins are rarely used for real-world payments (there is little need for sterling denominated stablecoins if people are not seeking to pay UK merchants with stablecoins).
• On February 20, 2026, total stablecoin market capitalization was nearly $308 billion; of that, the market capitalization of stablecoins pegged to currencies other than the USD was just over $1 billion.[5]

• Stablecoins offer little by way of technological innovation or improved financial inclusion.

• The World Economic Forum concluded that “stablecoins as currently deployed would not provide compelling new benefits for financial inclusion beyond those offered by pre-existing options.”[6]

• The vast majority of holders rely on crypto exchanges to acquire and cash out of stablecoins (and a bank account is typically a prerequisite for opening an account with a crypto exchange).  In 2021, Alexis Goldstein testified that after factoring in fees paid to crypto exchanges, a sample remittance transaction that cost $4.88 with Western Union would cost somewhere between $5.98-9.58 using Coinbase and $66.40 using Binance, if the transaction were performed using stablecoins.[7]

• Stablecoins’ underlying blockchain technology is significantly less efficient than traditional centralized methods of processing payments, and therefore struggles to scale.  If performed using a blockchain, transaction processing can be slow in addition to being costly.  Significant amounts of stablecoin transaction processing are therefore performed on traditional centralized databases, just like bank payments.[8]

• Blockchains are often used as the final settlement layer for stablecoin transactions, and some cost-saving efficiencies can be achieved by avoiding regulatory compliance (for example, anti-money laundering checks) if blockchains are deemed sufficiently “decentralized” to avoid legal requirements. Blockchains are not as decentralized as claimed, however. 

• Many stablecoins are ultimately settled on the Ethereum blockchain.  In 2024, S&P reported that concentration was such that the two largest validators on the Ethereum blockchain working together would control more than half the computing power supporting the network – allowing them to take it over, if they so wished.[9]

• A 2024 memo penned by a member of the Ethereum Foundation (which maintains the Ethereum blockchain’s software) raised concerns that “Vitalik [Buterin] absolutely has complete indirect control over it.”[10] 

2. Risks posed by stablecoins

• 2.1 Consumer protection risks
• As noted above, traditional centralized databases do much of the work in facilitating stablecoin transactions, but when blockchains are used for the final settlement, that adds new risks for any consumers who decide to use stablecoins for payments.
• Transactions processed on a blockchain are functionally irreversible, which makes crypto (including stablecoins) particularly attractive to fraudsters and hackers.
• There are also privacy risks associated with making a record of a person’s payment history visible to everyone (including employers, stalkers, and domestic partners).[11]
• 2.2 Financial stability risks
• Stablecoins are not stable, regularly losing their peg to the US dollar.
• One Moody’s study found that “large fiat-backed stablecoins depegged 600+ times in 2023.”[12]

• The Bank for International Settlements found that “while stablecoins backed by fiat currency, commodities or other cryptoassets have generally been less volatile than traditional cryptoassets, not one of them has been able to maintain parity with its peg at all times.”[13] 

• Prior depegging events have rarely caused runs, but if stablecoin use cases move beyond speculation and illicit payments, holders are likely to become more sensitive to depegging events and may run (much as holders of money market mutual funds did in 2008 and 2020).

• USDC’s value did fall below 90 cents during run on Silicon Valley Bank (where it held $3.3 billion on deposit).[14]  Coinbase temporarily paused conversions of USDC into dollars; USDC recovered its peg once guarantees of Silicon Valley Bank’s uninsured deposits were announced.

• If institutional adoption of stablecoins for transaction settlement purposes becomes more prevalent, then runs on stablecoins are more likely to impact financial stability.

• A run on a stablecoin could impact the stability of banks that hold stablecoin reserves in deposit accounts, as well as markets for US Treasuries.[15]  Government bailouts are likely, in order to avoid such eventualities.

• Even in the absence of a run, the growth of stablecoins could lead to contractions in the availability of credit if stablecoins significantly erode the market for bank deposits.

• Research on substitution effects varies significantly, but the Independent Community Bankers Association estimates that “continuing to allow crypto intermediaries to pay interest or yield on payment stablecoin holdings would reduce community bank lending by $850 billion due to a $1.3 trillion reduction in the industry’s deposits.”[16] 

• Large tech platforms may issue stablecoins as part of “everything apps” modelled on China’s Alipay and WeChat – Chinese authorities have acknowledged the financial stability and competition harms posed by these everything apps.[17] It is possible that a large tech platform offering an everything app could prove “too big to save” if its stablecoin were to suffer a run.

• 2.3 Crime and risks to national security
• The ultimate settlement layer of the blockchain is vulnerable to hacks and other threats because there is no regulated entity that can be held accountable for maintaining blockchain software or cybersecurity protections.

• The stablecoin Tether has become popular among criminals (including drug cartels and human traffickers).  It is also used for sanctions evasion, and is popular with North Korean hackers seeking to fund the North Korean nuclear program.[18]

• Stablecoins maintain their pegs through reliance on existing monetary and banking systems they claim they will replace.  If stablecoins significantly erode the market for bank deposits, this may limit the efficacy of monetary policy (which is carried out through the banking system). 

• Particularly at a time when decoupling has become an increasing priority for the UK and Europe, it seems unwise from both a political and a monetary policy perspective to allow a US tech platform to control a significant portion of the global money supply.

3. The GENIUS Act as cautionary tale

• The GENIUS Act became law in the United States in July 2025.  The legislation was voted upon after unprecedented political contributions from the crypto industry,[19] and is designed to serve industry needs.  It fails to address the risks stablecoins pose for the public, yet seeks to facilitate their usage as a consumer means of payment and institutional speculation as well as the development of everything apps. 
• For a comprehensive critique of the GENIUS Act, see Arthur E. Wilmarth, Jr., The Looming Threat of Uninsured Nonbank Stablecoins.[20]  Risks associated with stablecoins would be better addressed by banning their use, or if a ban is not desired, by implementing structural separations between crypto and banking.
• Importantly, GENIUS regulates stablecoin issuers but not crypto exchanges.  This means that foreign-issued stablecoins (like Tether) don’t have to fully comply with the GENIUS Act.  It also means that affiliated crypto exchanges can pay rewards to stablecoin holders that can substitute for interest (stablecoin issuers are not permitted to pay interest under GENIUS).
• 3.1 Consumer protection under GENIUS
• Fees paid to crypto exchanges for stablecoin conversions are unregulated, as are other conflicts of interest that may exist between crypto exchanges and stablecoin issuers.
• Consumer protections regarding stablecoin redemption are limited – currently, the terms of service of USDC provide that most holders have no direct redemption right from the issuer (this does not mitigate run risk, because larger institutional holders do have redemption rights from USDC).[21]

• Threats to consumer privacy are not addressed.

• GENIUS precludes the application of the securities laws to stablecoins, notwithstanding that speculative investment is the primary legal use case for stablecoins.
• 3.2 Financial stability under GENIUS
• Stablecoin reserve requirements are the legislation’s primary defense against runs, but they are likely to be insufficient in the absence of other protections like deposit insurance, lender of last resort access, or a bespoke resolution regime.  Although not contemplated by the GENIUS Act, bailouts are likely if there is a run on a systemically important stablecoin.

• Repos and money market mutual funds are permitted as stablecoin reserves, notwithstanding that they themselves are vulnerable to runs.[22]

• The legislation calls for capital and liquidity requirements to be established by regulators, but these are directed to be “tailored.”  Stablecoin issuers are able to choose their regulator, which incentivizes a “race to the bottom” on these requirements.

• Despite claims that GENIUS gives stablecoin holders first priority if a stablecoin issuer were to fail, Adam Levitin’s analysis has determined that holders will only receive fifth priority in a resolution.[23]  The uncertainty and delay associated with resolution may exacerbate panics and encourage runs.

• GENIUS provides a path for non-financial businesses – including large tech platforms – to issue stablecoins.  This lays the groundwork for the evolution of “too big to save” everything apps.

• 3.3 National security and crime under GENIUS
• GENIUS does not address the operational vulnerabilities of blockchain technology.

• GENIUS has been criticized by New York’s Attorney General Letitia James and Manhattan District Attorney Alvin Bragg for failing to adequately address the use of stablecoins by terrorists and criminals, and failing to protect consumers from fraud.[24]

22 February 2026