By Phoebe Seers and Elizabeth Howcroft

LONDON, Feb 25 (Reuters) - Britain's Revolut will start testing a crypto token pegged to the British pound, in a trial ‌with three small companies but no big high-street lenders, the Financial Conduct ‌Authority said on Wednesday.

The trial will take place as part of the financial regulator's "sandbox" programme, which allows ​firms to trial stablecoin products in controlled conditions, it said.

Britain's larger financial firms have generally been more cautious in their approach to stablecoins - a type of cryptocurrency pegged to a fiat currency - than European and U.S. counterparts, partly because of scepticism from the Bank ‌of England.

BoE Governor Andrew Bailey ⁠has expressed a preference for banks to focus on "tokenised", or blockchain-based, deposits instead.

WORK ON TESTING TO START THIS QUARTER, REVOLUT SAYS

Along with ⁠Revolut, the regulator said that Monee Financial Technologies, ReStabilise and VVTX would be part of the testing, looking at possible use cases including payments, wholesale settlement and crypto trading.

London-based Revolut ​has ​grown rapidly in recent years and is Europe's ​most valuable financial technology business.

The ‌company, which received a UK banking licence with restrictions in 2024 but is still waiting for a full licence, said it would begin work "this quarter" on testing a stablecoin.

A source familiar with the matter said the work would focus on the issuance of a pound-denominated stablecoin.

STABLECOIN VOLUMES SURGED

Stablecoin volumes have surged in recent years, led by El ‌Salvador-based Tether, which says it has more than $180 ​billion of its dollar-pegged token in circulation.

In October, ​AFME said European stablecoins, including tokens ​based on the euro, British pound, and Swiss franc, represent ‌less than 0.2% of the global market.

Stablecoins ​are mostly used in ​crypto trading, but some banks say they could make mainstream financial services more efficient.

The BoE told banks in 2023 that if they want to issue ​stablecoins, they should do so ‌under separate branding to avoid confusion between the protections offered for bank ​deposits and those for stablecoins.

(Reporting by Phoebe Seers and Elizabeth Howcroft; Editing ​by Tommy Reggiori Wilkes and Jan Harvey)