UK Stablecoin Regulation: go further and faster

The summer of stablecoin

The United Kingdom has clearly signposted its desire to be a cryptoasset jurisdiction of choice. Barely a week goes by without a UK Government minister or regulator making a speech to that effect. Or maybe it just feels that way. However, the UK is far from alone in this aspiration and the constant messaging.

Q2 2025 saw a flurry of regulatory activity, including FCA Discussion Paper 25/1 (Regulating Cryptoasset Activities), FCA Consultation Paper 25/14 (Stablecoin Issuance and Cryptoasset Custody), FCA Consultation Paper 25/15 (A Prudential Regime for Cryptoasset Firms), a draft Cryptoasset Statutory Instrument (cryptoasset related regulated activities), the Law Commission's Digital Assets in Private International Law consultation. In addition the Property (Digital Assets etc) Bill (recognising a new third type of personal property right) continues its legislative journey. Much is happening in the rest of the world too, including Hong Kong's Stablecoins Bill and the USA's GENIUS Act.

2025 has also seen a flurry of market activity; including the 'summer of stablecoin'. However, not everyone is enthusiastic. Stablecoins "fall short of requirements to be the mainstay of the monetary system" according to the Bank of International Settlements (BIS).

Our overview of the technical detail of the UK's Stablecoin Consultation is here. In this article we give some perspective on the UK's proposed framework.

Recap

A stablecoin is a private sector digital 'currency' (cryptocurrency) intended as a means of exchange (payment mechanism) which aims to maintain a stable value relative to a specified asset. For example a US Dollar stablecoin seeks to maintain parity with fiat US Dollars (ie parity with US Government-backed US Dollars). Stablecoins, like many other digital assets, use a form of technology called distributed ledger technology (DLT).

A Central Bank digital currency (CBDC) comes with the full faith and credit backing of the issuing Central Bank as an organ of the sovereign state, in the same manner as fiat currency. Stablecoins are issued by private organisations and do not have this guarantee. For this reason each stablecoin has its own parity stabilisation mechanism, most often using real world high-quality and liquid backing assets.

Why do stablecoins matter?

To transact in the DLT world, there has to be a straight-forward way to transfer digital value to and from the fiat/ traditional ecosystem ('on-' and 'off-ramping'). Although there are nascent CBDCs there is currently no CBDC which performs this role, so stablecoins fill the gap. This fact, together with the Trump Administration's ban on a US Dollar CBDC¹, mean that stablecoins will play a crucial role in digital assets' development.

An unstable past

Digital assets often hit the headlines for the wrong reasons. In 2022 the TerraUSD stablecoin crashed. TerraUSD's price stability mechanism was algorithmic, and not backed by real world assets (RWA). In simple terms, TerraUSD's value and stability relied on traders arbitraging its value with a non-stabilised sister cryptocurrency called Luna. The concept works in theory, but crucially only whilst there is confidence in both Luna and TerraUSD. Otherwise, as happened, both cryptocurrencies enter a 'death spiral' as traders race for the exit.

Although Tether (pegged at US$1) is a RWA-backed stablecoin, TerraUSD's 2022 crash caused the trading price of Tether to slip to US$0.94 at one point. Nonetheless, according to reports, Tether continued to make all requested redemptions during 2022 at parity. Tether was then, and is now, the world's largest stablecoin by market capitalisation.

Stablecoin regulation, amongst other things, clearly aims to avoid a repeat of TerraUSD's issues and ensure a safe and prudent framework such that end users do not lose the coins' value.

UK-issued stablecoins

Under the UK proposals, any UK-issued stablecoin must be 100% RWA-backed with high quality liquid assets. Parity backing is not uncommon for stablecoins. For example, both Tether and USDC stablecoins self-report as fiat currency parity-backed. In contrast the DAI stablecoin, whilst soft-pegged to the US Dollar, is reported to be asset-backed by a mix of other cryptocurrencies. This is a deliberate design choice by DAI's founders and very much follows the decentralised and privacy-first ethos of early blockchain pioneers.

As we noted previously, there are additional protections for UK-issued stablecoins. For example, the FCA has proposed a model whereby each stablecoin's backing assets would be held on a statutory trust in favour of the coin holder, in a segregated account, and with an independent third party bank/depository. The stablecoin issuer will be the trustee and owe fiduciary duties. All holders of the stablecoin will be entitled to direct no-minimum redemption within a prescribed time limit (essentially T+1). Interest on backing assets cannot be distributed to coin holders, and backing assets must be reconciled daily.

A mixed bag

Whilst these consumer-protection measures are welcome, there are critiques:

• The UK's proposed regime is broadly comparable to other major financial centres, such as France, Hong Kong and Singapore. However with the UK's notoriously slow (although hopefully improving) regulatory authorisation process, why would the UK be the destination of choice for a stablecoin issuer?
• An issuer cannot mint (ie create) additional stablecoins unless they are pre-funded by backing assets. This requirement, together with the obligation to hold the backing assets in high quality and liquid assets, could make UK stablecoin issuance uneconomic.
• Interest on backing assets cannot be distributed to coin holders. Although the USA's GENIUS Act will not permit interest payment, at the time of writing it may be possible for an affiliate of the issuer to provide related "rewards".
• Whilst direct redemption with no de-minimis, and daily backing asset reconciliation, could be argued as a non-negotiable, existing stablecoins do not always have these features. These rules could also discourage UK issuances – currently no stablecoins are issued from the UK.
• Atomic (ie instantaneous) settlement, blockchain as an immutable record, and instant reconciliation are DLT game changers. The UK could have taken this opportunity to fully embrace the technology's advantages (for example using digitally pre-vetted whitelisted wallets for redemptions). Unfortunately the UK's proposed regime remains mostly on traditional finance (TradFi) rails.
• We still do not have a complete picture of the UK's stablecoin regime. For example systemic stablecoin will be regulated by the FCA and the Bank of England. However the test for a systemic stablecoin has not been published.
• The UK proposal mandating stablecoin issuers to top-up insufficient backing assets sounds attractive in theory. In reality, if there are insufficient backing assets and the stablecoin issuer has financial difficulties there is unlikely to be a top-up. In this situation there is in effect no remedy.

Non-UK issued stablecoins do not have to comply with the UK issuance rules; only UK-issued stablecoins are caught. Although non-UK issued stablecoins could be caught by other UK regulation (for example, if the non-UK issued stablecoin is admitted as a "qualifying cryptoasset" to a UK trading platform), there is potentially an uneven playing field. Stablecoins circulating in the UK could be subject to different regimes; some issued in the UK (subject to UK-issuance rules), some not. At best this is likely to be confusing for consumers. In addition, if other jurisdictions have less onerous stablecoin issuance regulations, organisations may choose to issue their stablecoins overseas for admittance to a UK trading platform post-issue. In other words, the UK rule could discourage UK-issuances but also permit less regulated stablecoins to circulate in the UK.

There are some positives:

• The UK's proposed regime contemplates the possibility (but not yet the logistics) of multi-currency stablecoin. Although the idea of a multi-currency stablecoin is not new, none currently exist as far as we know and we applaud the FCA's openness to market developments.
• The FCA takes a technology agnostic approach. For example, provided that risks are appropriately managed, all forms of DLT may be used (whether private, public, permissioned or permissionless blockchains). This is a very welcome regulatory stance, in comparison to other regulators such as the Basel Committee on Banking Supervision.

Go further and faster

Although not yet fully formed, the UK's stablecoin regime treads a cautious and conservative path. If rumours are to be believed, the Bank of England thought that even that is too liberal. Either way, it is hard to square the UK's proposed stablecoin regulatory framework with the UK Government's aspiration to make the United Kingdom the global cryptoasset destination of choice.

The consultation closes on 31 July 2025. We hope that the UK Government and Regulators take the consultation reflection as an opportunity, using the words of the UK's Chancellor of the Exchequer, to go "further and faster".