In April 2022, the UK government announced plans to legally incorporate stablecoins into their financial services sector. The legalization of these stablecoins is part of a wider plan to make the country a global hub for digital asset technology and investment, as expressed by Chancellor of the Exchequer, Rishi Sunak.
In the weeks since the algorithmic stablecoin TerraUSD depegged and unraveled an already fragile crypto market. The crypto community waited with bated breath to see if the UK would backpedal on its previously stated intentions.
The United Kingdom’s Plan Of Action
The crash appeared to do little in the way of discouraging the powers that be in London. So much so that alongside the regulation of stablecoins (albeit non-algorithmic ones), the Chancellor of the Exchequer has commissioned the Royal Mint to create a non-fungible token (NFT) to be released later this year.
With undeterred interest, the government stated that stablecoins pegged to fiat currencies, “have the capacity to potentially become a widespread means of payment… An amended e-money framework can deliver a consistent framework to regulate stablecoin issuance and the provision of wallets and custody services.”
It was also stated that the UK will be exploring the “potentially transformative” benefits of Distributed Ledger Technology (DLT) in its financial markets alongside a financial market infrastructure (FMI) ’Sandbox’ that will allow companies to test the use case potential.
The Catch
Presently, stablecoins are exclusively traded on crypto exchanges and are not yet incorporated into mainstream payments architecture. However, it is perfectly legal for anyone to use them in traditional markets.
Today, in the UK, stablecoins are largely used as an efficient and cost-effective e-payment system that uses banks as gateways. Technically speaking, the payment options included in this system (debit cards, credit cards, bank transfers, PayPal, checks and even mobile money) are not considered to be legal tender in the UK. According to the law, only banknotes and coins are considered legal tender. In Scotland, only coins have the official stamp of approval.
This means that in order for a currency to be adopted by mainstream payment systems, it needs only be widely accepted, and not necessarily “legal” in a specific national market.
Stablecoins On The Menu
Building a legal framework around stablecoins will do well to restore stakeholder confidence in them, providing the general public with a reinforced surety after the recent bout of volatility. By incorporating stablecoin regulation into its already stringent and comprehensive regulatory framework surrounding electronic payments, the UK government will propel the digital currencies' widespread use.
The only snag is that it is unlikely that the UK will give the green light to the already well-established stablecoins USDC and USDT that are pegged to the US dollar and not the local British pound. From the government's perspective, using an entirely different currency makes little sense in a move that is meant to “make things easier.”
What seems more likely is that an established British entity will release a stablecoin pegged to the British pound. And who is the most likely to sink their teeth into that endeavor? The Bank of England.
Industry insiders are speculating that either the Bank of England will issue a stablecoin (more accurately referred to as a Central Bank Digital Currency, or CBDC), or the companies behind the two biggest stablecoins mentioned above will create a GBP-pegged coin. With Tether based in Hong Kong and Circle (the company behind USDC) based in the US, neither has much use for a GBP-pegged stablecoin, unless of course, the UK explicitly encourages merchants to accept them.
With the UK government blazing ahead with their new crypto-focused future, it’s only a matter of time before one of these companies creates the GBP pegged stablecoin it dreams of, and widespread adoption for the British public ensues.
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