City of London Corporation – Written Evidence (STA0034)

House of Lords Financial Services Regulation Committee – inquiry into

growth and proposed regulation of stablecoins in the UK.

Memorandum from the City of London Corporation 

Submitted by the Office of the City Remembrancer 

As the governing body for the Square Mile, the City of London Corporation (CoLC) is committed to empowering the financial and professional services ecosystem - from start-ups to established multinationals. 

Questions:

1. How has the global market for, and the issuance of, stablecoins developed since 2014? How does the UK market compare to the US and the EU?

The global stablecoin market has expanded from a niche crypto-trading utility in 2014 into a large-scale payment and settlement ecosystem by 2026. From 2014 to 2017, stablecoins were primarily used as trading-pair collateral on crypto exchanges, allowing users to move between volatile cryptoassets and a dollar proxy without accessing traditional banking rails. However, market capitalisation remained modest, and was in the low single-digit billions of US dollars by 2017-2018.

Growth accelerated during 2019-2021 driven by the expansion of decentralised finance (DeFi) and broader crypto-assets market growth. Stablecoins became deeply embedded in on-chain lending, derivatives and liquidity pools. After the market stress and high-profile failures of 2022-23, including algorithmic stablecoin collapses, growth resumed from 2024 onwards under a more institutional and payments-oriented model. By mid-2025, global market capitalisation had roughly tripled since 2023 to approximately £192.4 billion (around USD 250-260 billion), while 2024 transfer volumes reached approximately £17.02 trillion (around USD 23 trillion)[1] - exceeding the combined volumes of Visa and Mastercard when total on-chain flows (including trading and automated activity) are included.[2]

Although trading-related usage still accounts for a majority of activity, stablecoins are increasingly used for cross-border payments, business-to-business (B2B) payments, institutional treasury management and settlement of tokenised real-world assets.

The stablecoin market to date remains overwhelmingly USD-denominated and concentrated in a small number of issuers. This reflects US dollar reserve currency status, the liquidity of US Treasury markets backing reserve assets, and the integration of USD stablecoins across global trading platforms.

In comparison, the United States leads in market depth and scale. 99% of global stablecoins are USD-denominated and either US-domiciled or closely linked to US financial infrastructure.[3] While the regulatory framework has been fragmented across state money transmission regimes, banking law and federal securities and commodities regulation, there is increasing convergence toward a federal payment stablecoin framework (GENIUS Act) emphasising high-quality liquid asset backing, redemption rights and enhanced supervisory oversight.

The European Union has adopted a comprehensive codified framework through the Markets in Crypto Assets Regulation (MiCA). MiCA introduces a specific regime for asset-referenced stablecoins and e-money stablecoins, imposes reserve and governance requirements, provides passporting across EU Member States and gives a supervisory role to the European Central Bank for significant issuers. Although the euro-denominated stablecoin market remains smaller than the USD market, MiCA’s harmonised structure may support gradual expansion.

The United Kingdom’s domestic sterling stablecoin market is comparatively small, with most UK-based activity relying on USD stablecoins. However, the UK is implementing a bespoke framework that brings certain fiat-backed stablecoins used for payments within the regulatory perimeter. Systemic stablecoins will fall under the prudential supervision of the Bank of England, while non-systemic stablecoins, issuance and conduct requirements will be overseen by the Financial Conduct Authority (FCA). Sterling-denominated stablecoins are expected to grow steadily over the coming years if banks and payment service providers scale issuance and integrate stablecoins into domestic payment rails and tokenised asset markets. Nevertheless, USD network effects are likely to persist.

2. How is the sterling denominated stablecoin market in the UK expected to develop in the coming years?

a. Who uses stablecoins and for what purposes?

Stablecoins are used by a diverse set of participants. Crypto traders and DeFi users remain the dominant source of transaction volume, employing stablecoins as collateral, liquidity instruments and settlement assets within decentralised protocols. Fintech firms and payment service providers increasingly use them for cross-border payments and business-to-business payments, attracted by 24/7 settlement, reduced fees and programmable features. Institutional investors and corporates use stablecoins for treasury management, liquidity optimisation and delivery-versus-payment settlement of tokenised securities. Retail users employ stablecoins for peer-to-peer transfers, access to dollar exposure in emerging markets, and yield-generating strategies, albeit with varying degrees of risk.

In the UK context, usage remains concentrated in crypto trading and pilot programmes for wholesale and merchant payments, though institutional experimentation is increasing.

b. Are there any existing rules impacting the growth of stablecoins in the UK?

Several existing—and expanding—UK regulatory frameworks already shape stablecoin growth ahead of the full 2026 regime. While these rules provide greater legal clarity and consumer protection, they also increase compliance costs and barriers to entry.

Currently, stablecoin activity falls within the broader cryptoasset, payments and financial services perimeter. Cryptoasset exchange and custodian wallet providers must register with the FCA for Money Laundering, Terrorist Financing and Transfer of Funds (AML/CFT) supervision, requiring customer due diligence, transaction monitoring and reporting. This strengthens market integrity but raises operational costs and limits lightly intermediated or anonymous models.

Where stablecoin issuance or redemption involves fiat backing or safeguarding, firms may fall under the Electronic Money Regulations or Payment Services Regulations. In such cases, authorisation as an electronic money institution, capital requirements and redemption-at-par obligations may apply. These enhance consumer protection but increase fixed compliance burdens, particularly for smaller firms.

Financial promotion rules introduced in 2023 further constrain retail distribution, requiring clear risk warnings and appropriateness assessments and restricting incentives. Stablecoins cannot be marketed as risk-free deposit substitutes. In addition, custody and trading services are being brought within scope under Financial Services and Markets Act amendments, requiring client asset protection and operational resilience standards.

From 2027, the Financial Services and Markets Act 2000 (Cryptoassets) Regulations will formally regulate fiat-backed payment stablecoin issuance and custody, while the Bank of England will oversee systemic stablecoins, and the FCA will oversee non-systemic stablecoins. The new FCA regulatory sandbox with a cohort for stablecoins could already shape market behaviour in anticipation.

3. What opportunities and risks does the growth of stablecoins (both denominated in sterling and in USD) pose for the UK’s economy and its financial services sector, and for retail customers? What evidence is there to suggest that this growth could disrupt the conduct of monetary policy and traditional financial intermediaries? Are there any additional financial crime considerations?

Stablecoin growth offers economic opportunities but also presents systemic risks. They can lower cross-border payment costs, improve wholesale settlement efficiency, and support London’s role as a hub for tokenisation and digital finance, while creating new revenue streams in custody, reserve management, and blockchain-based settlement. Retail and SME users can benefit from faster, cheaper, and programmable payments.

Stablecoins can also support tokenised capital markets by acting as assets for digital securities and other on-chain financial instruments, enabling atomic delivery-versus-payment (DvP), automated collateral management, and continuous settlement.

However, stablecoins should not be viewed as the sole bridge between tokenised markets and the traditional financial system. In practice, a more diversified architecture is likely to emerge in which stablecoins operate alongside other DLT-based settlement assets, including tokenised bank deposits, tokenised money market funds (MMFs), and potentially central bank digital currency (CBDC). Such diversification can support systemic resilience by distributing activity across different issuers, balance sheets, and regulatory frameworks, rather than concentrating risk in a single private instrument.

Nevertheless, financial stability risks could arise as adoption grows. Widespread use of USD-denominated stablecoins in the UK could weaken monetary transmission and affect monetary aggregates, although current volumes do not pose an immediate threat to price stability. Other risks include potential reserve runs, concentration of reserves in short-term sovereign debt, operational and cyber vulnerabilities, and retail exposure to depegging events, particularly in non-fiat-backed models. Financial crime risks also remain, including sanctions evasion, fraud, and illicit cross-border flows, although blockchain analytics have improved traceability.

Major financial market infrastructures are integrating stablecoins into tokenisation and on-chain settlement pilots. The Bank of England has tested stablecoin-enabled delivery-versus-payment via its Regulated Settlement Network, while Euroclear and LCH are exploring euro-denominated digital bonds and tokenised repo markets. These initiatives highlight stablecoins’ role as programmable, 24/7 settlement assets supporting atomic DvP, automated collateral, and intraday liquidity.

Without scaled sterling rails, the UK risks losing wholesale liquidity and related clearing, custody, and FX activity to USD or euro infrastructures. Proactive integration of FMIs with regulated sterling stablecoins could strengthen UK’s competitive position.

Stablecoins are used by crypto traders, DeFi participants, fintechs, payment providers, institutions, and corporates for collateral, liquidity, settlement, cross-border payments, and treasury management. Retail users employ them for peer-to-peer transfers, dollar exposure, and yield strategies. In the UK, usage currently focuses on crypto trading and pilot wholesale or merchant payments, but institutional adoption in tokenised assets and cross-border settlement is rising, suggesting broader uptake if supported by regulatory clarity and scalable sterling infrastructure.

4. How will the growth of stablecoins impact the Bank of England, PRA and FCA’s statutory objectives: price stability, financial stability, market integrity, consumer protection, competition and international competitiveness and growth?

For the Bank of England, price stability effects are currently limited but could grow if sterling stablecoins scale materially. Financial stability considerations are more immediate, justifying prudential standards for systemic arrangements to mitigate run and contagion risk.

For the PRA, indirect implications arise from potential deposit substitution and its impact on bank balance sheets and funding resilience.

For the FCA, stablecoin growth directly engages its objectives of consumer protection, market integrity and competition. Clear disclosure, redemption rights and safeguarding requirements support consumer protection, while proportional regulation can foster innovation and enhance the UK’s international competitiveness. Overall, a well-calibrated regime could support growth and competitiveness without undermining stability.

5. What implications do the Bank of England and the FCA’s proposed regulatory regimes pose for the adoption and growth of systemic and non-systemic stablecoins in the UK, and internationally? a. Are there any aspects of the Bank of England and FCA’s proposed stablecoin regulatory regimes that present challenges or require further consideration?

In its response to the Bank of England’s consultation on the proposed regime for systemic sterling stablecoins (November 2025), the International Regulatory Strategy Group (IRSG)—a joint initiative of TheCityUK and the City of London Corporation—expresses support for a clear regulatory framework but cautions that certain aspects of the proposals could constrain growth if not proportionate.

The IRSG highlights that requiring 40% of reserves to be held in unremunerated central bank deposits may undermine the UK’s competitiveness compared with USD stablecoins backed by yield-bearing assets, calling for greater flexibility. It also raises concerns over the Bank of England’s proposed holding limits, which could restrict both retail and wholesale adoption. The group warns that overly conservative calibration, particularly relative to the EU’s Markets in Crypto-Assets Regulation (MiCA) and US approaches, risks pushing activity offshore. While endorsing the split between the Bank of England’s systemic oversight and the Financial Conduct Authority’s (FCA) conduct supervision, the IRSG stresses the need for clearer guidance and proportionate rules to maintain the UK’s competitive edge.[4]

In its response to the FCA’s Consultation Paper CP25/14 on stablecoin issuance and cryptoasset custody (May 2025), the IRSG identifies several regulatory frictions that could similarly hinder growth if not addressed proportionately. It notes that classifying payment stablecoins as “specified investments” under FSMA creates overlap with e-money and Payment Services Regulations, resulting in dual compliance obligations and increased operational burdens. The IRSG also flags FCA custody rules, which apply even when overseas custodians hold assets for UK customers, as a potential barrier that conflicts with global custody norms. Operational complexities arise where investment firm obligations—including prudential, conduct, and disclosure requirements—clash with the realities of payment systems, discouraging market entry and innovation in digital payments.

The IRSG further highlights strategic risks, such as the lack of grandfathering from non-systemic to systemic status, which can create operational discontinuities and disincentivise scaling, and unclear thresholds for systemic designation, leaving mid-tier firms in regulatory limbo. It warns that overly conservative or misaligned rules, particularly compared with MiCA and US approaches, could drive stablecoin issuance and tokenised market activity offshore. Emphasising the principle of “same activity, same risk, same outcome,” the IRSG cautions that current proposals risk over-regulating payment functionality through an investment-product lens. Clearer guidance and proportionality, it concludes, are essential to support adoption and maintain the UK’s competitiveness in digital payments.[5]

6. What can the UK learn from the way other jurisdictions have approached the regulation of stablecoins, such as the US and the EU?

The UK can draw several lessons from the US experience. Clear supervisory allocation and early legal certainty are critical, even where regulatory frameworks are fragmented. Strong transparency requirements and regular reserve disclosures, as seen with USD stablecoins, help maintain market confidence and support adoption. Furthermore, recent signals from the US government and regulators indicating a commitment to lead in digital assets innovation have increased industry confidence, encouraging firms to incorporate stablecoins into payment, settlement and treasury models.

From the EU, MiCA shows the practicalities of a harmonised, passportable regime. Businesses have praised the legal certainty and institutional scale from MiCA , though restrictive caps and a lack of clarity around multi-issuance are argued to limit market growth. For stablecoins, MiCA provides a template framework which breaks stablecoins into two categories: Asset Referenced Tokens (ARTs) and E-Money Tokens (EMTs), each of which has their own distinct regulatory guardrails. The effect of this has been regulatory clarity and a reduction in the opportunities for regulatory arbitrage. As stakeholders reflect on MiCA one year after its implementation, however, attention is being paid to the density of its associated bureaucracy which results in higher compliance costs for firms. MiCA also places notable restrictions, and a lack of clarity, on stablecoins issued outside of the EU to protect monetary sovereignty, specifically regarding USD-stablecoins. A consortium of eight EU retail banks has announced their intention to launch a MiCA-compliant Euro-denominated stablecoin in H2’26. Nevertheless, at this stage, USD dominance in payments means that Euro-denominated stablecoins make up barely 0.2% of the total stablecoin market cap.

The UK faces a similar choice on whether it supports sterling-denominated stablecoins to promote currency sovereignty, or whether the UK takes a neutral approach, is open to the global stablecoin market and overseas regimes, and focuses on broader financial stability issues.

Recognising overseas regimes offers UK firms access to USD/euro liquidity, lowers compliance costs, and supports interoperability with global trading and DeFi platforms, while allowing the UK to develop domestic GBP stablecoins. However, divergences in collateral treatment, reserve rules, marketing, and backing asset requirements create compliance challenges and arbitrage risks. Interoperability needs vary by use case: USD stablecoins dominate cross-border flows, GBP stablecoins suit domestic payments, and tokenised securities may require both depending on settlement context.

10 March 2026