Scottish Centre of Excellence for Digital trust and DLT – Written Submission (STA0038)
Submission to the House of Lords Financial Services Regulation Committee
Growth and Proposed Regulation of Stablecoins in the UK
Submitted by: Scottish Centre of Excellence for Digital Trust (TRUST)
Date: March 2026
Disclosure: Generative AI tools were used in the preparation of this submission for the purposes of copy editing and grammar correction. All substantive content, analysis, and recommendations reflect the views of the Scottish Centre of Excellence for Digital Trust. The Centre takes full responsibility for the contents of this submission.
1.The Scottish Centre of Excellence for Digital Trust (the “Centre”) is an industry and academic body anchored at Edinburgh Napier University, led by CEO Peter Ferry and Director Professor Bill Buchanan. It is supported by the University of Edinburgh, the University of Glasgow, FinTech Scotland, and Scottish Enterprise. Established in 2025, the Centre’s mission is to position Scotland as a leader in digital trust technologies by fostering collaboration between industry and academia, addressing real-world challenges through an innovation sandbox, consulting on regulation and supporting the development of robust, trust-based digital systems. The Centre is supported by an institutional Financial Services steering group and Digital Trust Taskforce members from across industry and academia who contribute their time to support its initiatives.
2.The Centre’s work spans digital payments, digital assets, and digital identity. This work extends to cryptographically secured systems, blockchain, and cybersecurity, which the Centre regards as areas of focus for modern financial services. Its activities include industry-led research, skills development, innovation challenges and catalysing new investment and the formation of scalable businesses in Scotland.
3.This submission was prepared by Peter Ferry and James Ball - drawing on the Centre's expertise. In preparing this submission, the Centre consulted members from across the Scottish fintech, finance, and academic research communities. Amongst recent achievements, the Centre, alongside partners Siccar, Nethermind, and TrackGenesis was shortlisted for their proposed solution at the Bank of England DLT Innovation Challenge. This submission represents the Centre’s considered position on the growth and regulation of stablecoins, drawing on its membership expertise alongside publicly available data on Scotland’s financial services sector.
4.The stablecoin market has grown from a niche instrument serving cryptocurrency traders into a systemically significant on-chain asset class. With total market capitalisation of these assets reaching approximately $306 billion by late 2025. Stablecoin markets are dominated by USD-denominated stablecoins, principally Tether (USDT) and Circle (USDC), which together account for approximately >80% of total stablecoin market capitalization.
5.USD-denominated stablecoins account for over 98% of total stablecoin market capitalisation, whilst sterling accounts for 10.2% of global FX turnover. This asymmetry is likely indicative of structural underrepresentation of GBP in tokenised money infrastructure. The Centre believes that this imbalance may have direct implications for the competitiveness of UK-based financial services. Exposure to GBP is currently a challenge in tokenised money markets, and without intervention, on-chain settlement may default to instruments denominated in, and governed by, US monetary and regulatory conditions.
6.A subset of stablecoins operate entirely outside the custodial model the proposed framework is designed to regulate. These are crypto-collateralised instruments that maintain their peg through over-collateralised on-chain positions and have no issuer to regulate in the conventional sense (examples include DAI and GHO, issued through the Sky Protocol and AAVE respectively). These instruments are typically crypto-collateralised by assets such as Bitcoin or Ethereum, and rest in decentralised smart contracts with questionable control and governance. The current proposals do not address this category. The Centre regards this as a material gap and returns to it under Question 5.
7.The Centre’s view is that a regulated GBP stablecoin market is likely to develop in the coming years. Its trajectory will be shaped by the regulatory choices now being made, alongside the speed at which incumbent institutions and fintech challengers move to build compliant infrastructure.
8.Current stablecoin usage in the UK spans several distinct populations. Today, retail users typically hold USD stablecoins primarily as a stable store of value within cryptocurrency portfolios, access to international remittance markets or as a means of accessing DeFi applications. Institutional and corporate users are increasingly exploring stablecoins for cross-border payments, intraday liquidity management, and as settlement assets in tokenised securities transactions. Within the asset management community, the most relevant use cases are delivery-versus-payment settlement, collateral mobility, and the operational infrastructure for tokenised funds and securities. These are wholesale, institutional use cases. The Centre recommends the proposed BoE/FCA regulatory regime give equal weight to wholesale settlement alongside retail payments, particularly given the concentration of asset management activity in Scotland.
9.The category of stablecoin-adjacent instruments is broader than the term alone implies. Tokenised bank deposits - issued by chartered banking institutions - constitute a functionally similar instrument. HMT’s draft Regulated Activities Order outlined a legal boundary between qualifying stablecoins, tokenised deposits, and e-money. That boundary addressed regulatory treatment; however it does not resolve the operational and supervisory ambiguity firms face when structuring wholesale products that sit across these categories. The joint BoE/FCA approach document, which would clarify how responsibilities apply in practice, has been deferred to later in 2026. For firms seeking to build compliant wholesale infrastructure ahead of the October 2027 commencement date, this absence is a concrete commercial barrier. Tokenised money market funds are emerging as a parallel instrument for institutional liquidity management, though meaningful deployment remains primarily a US market development with some Asset Managers launching products from the UK market - a Policy Statement covering fund tokenization from CP25/28 is expected in the first half of 2026. The Centre believes a wholesale CBDC could serve as an alternative settlement instrument, though the digital pound programme remains at an exploratory stage.
10.Regulatory uncertainty is not a neutral condition. For firms considering whether to build GBP stablecoin infrastructure, it functions as an active suppressor of investment. The full cryptoasset regulatory regime is not scheduled to take effect until October 2027. In the interim, firms must register under the Money Laundering Regulations 2017 and comply with financial promotions requirements, but there is no authorisation pathway and no clarity on how firms can structure compliant products ahead of the regime coming into force, outside of the FCA’s Regulatory Sandbox, to which four out of twenty applicant firms were selected. Firms may be less likely to commit capital to product development when the rules governing that product may change materially before launch. Fragmentation of regulatory responsibility across the FCA, BoE, PSR, and HMT compounds this uncertainty. The BoE went further still. Its November 2023 “Dear CEO” letter directed all regulated banks not to issue stablecoins and to cease any existing activity in that area - before any legislative regime existed and without clear legal authority to do so. The Centre regards this as overreach. It operated through supervisory expectation rather than formal prohibition, and its effect has been to exclude the institutions best placed to build credible GBP stablecoin infrastructure from the market before the rules governing that market have been written.
11.The transition from FCA to BoE oversight at the point of systemic recognition represents the most significant near-term barrier to GBP stablecoin issuance. Issuers cannot know in advance when or whether they will be designated systemic, and the compliance costs of that transition are substantial. The Centre recommends the joint BoE/FCA approach document address this directly and set out a credible transition pathway before the October 2027 commencement date.
12.The principal risk embedded in the proposed regulatory framework is not the risk of moving too fast, but of moving too slowly. The EU, United States, and Singapore have each committed to operational digital asset settlement infrastructure. As institutional financial markets progressively migrate to on-chain settlement rails, UK-based firms without access to a regulated GBP stablecoin will face a choice: route transactions through USD-denominated instruments and the regulatory conditions that govern them, or operate at a disadvantage relative to counterparts with access to regulated domestic digital money. For Scotland’s asset management sector, which manages over £500 billion in assets and relies on competitive settlement infrastructure, this is not a theoretical concern. The BoE should not move ahead of prudential readiness. Regulatory delay is, however, itself a form of systemic risk to UK financial services competitiveness, and one that deserves explicit acknowledgement alongside the more commonly discussed risks of adoption.
13.Scotland provides a relevant domestic precedent for navigating this balance. The Scottish banknote regime requires commercial banks to hold backing assets equivalent to their note issuance, alongside a small float of Bank of England notes. It has operated for over a century within a stable regulatory framework, demonstrating that robust backing requirements and institutional confidence are complementary rather than competing objectives. While the Centre supports the requirement to hold backing assets, the requirement for 40% unremunerated central bank deposit threshold - held in statutory trust - may constrain issuer revenue models. The Centre believes this constraint is likely to fall disproportionately on smaller or newer entrants, potentially concentrating the GBP stablecoin market among incumbents with diversified revenue streams, whilst offering stronger stability and consumer protection.
14.The Centre supports the development of a regulated GBP stablecoin market and regards the current legislative programme as the essential precondition for that development. Stablecoins represent a genuine new risk to financial stability, monetary policy transmission, and the commercial bank deposit base. The BoE’s proposed regime is, however, calibrated for a scale of adoption that does not yet exist and may not materialise under the proposals as currently drafted. The Centre believes that the prudent position is to build a regime capable of managing systemic risk as the market develops, rather than one that pre-empts market development entirely.
15.A framework that prevents the emergence of a regulated GBP stablecoin market does not eliminate exposure to stablecoin risk - it displaces it. Where UK consumers and businesses seek the efficiency benefits of stablecoin payments but find no regulated domestic option, they will use USD-denominated stablecoins operated by issuers outside UK regulatory oversight - this is a sovereignty concern. The resulting exposure - to instruments governed by OFAC rather than OFSI, and to FinCEN rather than the FCA - is itself a consumer protection failure. A functioning domestic GBP stablecoin ecosystem is one part of the remedy. However, the BoE and FCA framework alone cannot capture the USD-denominated stablecoins that currently dominate on-chain settlement, nor the regulatory conditions under which those instruments operate. This jurisdictional dependency is a concern the Centre regards as likely to require coordinated international action to resolve.
16.The Centre also draws attention to the risks posed by stablecoins issued on permissionless blockchains, where no single entity exercises control over the network on which the token operates. Where such systems are combined with privacy-enhancing technology and lack adequate compliance tooling, regulators’ ability to detect and respond to illicit financial activity may be materially impaired. The speed at which value can move across these networks compounds the concern: rapid, large-scale transfers could occur beyond the supervisory reach of the BoE, FCA, or PRA or before FI’s and issuers have time to respond.
17.The Centre regards the proposed holding limits of £20,000 for individuals and £10 million for businesses as too restrictive for wholesale use cases, and the backing requirements as disproportionate relative to the framework established under MiCAR. At these thresholds a GBP stablecoin would be structurally prevented from serving the wholesale settlement and treasury management functions that represent the primary demand from Scottish financial services firms.
18.The regulatory framework, as currently designed, is not fully consistent with the FCA’s competition objective. Holding limits and backing requirements at the proposed levels are likely to entrench incumbents with diversified revenue streams, stifle the innovation benefits that the technology is capable of delivering, and produce an end user experience for GBP stablecoin holders that compares unfavourably with USD-denominated alternatives already in circulation.
19.The regulatory framework is not well calibrated for wholesale use cases. The holding limits and backing requirements address retail payment risks but are likely to stymie B2B settlement. The deeper problems are structural whereby the FCA has approached stablecoin regulation by extending a securities intermediation framework to instruments designed to function as money. Intermediation requirements appropriate for retail investment products may be incompatible with the settlement properties that make stablecoins useful in wholesale markets, where direct transfer with atomic settlement between institutional counterparties - without intermediation at each leg - is the core value proposition of tokenization. Under the current model we end up with a compromised hybrid where securities settlement takes place on-chain but the cash leg is off-chain, adding timing risk and reconciliation overheads. The Centre disagrees with this approach and views it as regressive, believing that there should be a clear pathway for stablecoins to function as settlement assets in core wholesale markets or alternatively, a wholesale CBDC or Central Bank Settlement Token (Regulated Liability Network) becomes available.
20.The decentralised finance gap identified under Question 1 will require explicit regulatory consideration. Crypto-collateralised stablecoins operating on public permissionless ledgers have no issuer to regulate and no backing assets to segregate. The Centre does not suggest these instruments should be prohibited, but regards their exclusion from the current framework as a gap that may grow in significance as activity on permissionless public blockchains increases.
21.The Centre recommends that the UK treat MiCAR as its primary alignment target for stablecoin regulation. Geographic proximity, the scale of cross-border financial services activity between the UK and EU, and the sovereignty concerns identified earlier in this submission collectively make MiCAR the more appropriate reference framework. Alignment with MiCAR reduces dual compliance costs for firms operating across both jurisdictions and avoids compounding the UK’s existing dependency on USD-denominated instruments and the regulatory conditions that govern them. The Centre acknowledges that UK firms active in USD stablecoin markets will need to navigate the GENIUS Act and MiCAR regardless of domestic regulatory choices, but regards this as a reason to monitor GENIUS closely rather than to adopt it as a design template. It is too early to assess how MiCAR and GENIUS will interact with UK financial markets in practice, and the Centre recommends the UK retain flexibility to respond as that relationship becomes clearer.
22.The UK’s current framework creates a cliff-edge transition between FCA and BoE oversight. The Centre regards the binary systemic/non-systemic distinction as a structural weakness that may deter issuers from scaling in the UK market. The ambiguity at the point of systemic recognition addressed in Question 2.b is one which could be resolved with the adoption of a MiCAR style framework, which clearly distinguishes and outlines the definitions E-Money Tokens (EMT) and Asset Reference Tokens (ART) – and their respective regulatory purview. Additionally, MiCAR also clarifies which assets are out of scope, and therefore not regulated under the framework. This degree of legal clarity is one that the Centre would like to see adopted in the UK.
11 March 2026