BREAKINGVIEWS-UK’s endless stablecoin wavering may prove costly

By Pierre Briancon

BERLIN, Sept 23 (Reuters Breakingviews) - London needs to wake up if it wants to remain a major financial centre in the digital era. Japan, the European Union and the U.S. have already regulated the use of stablecoins - the $280 billion, fast-growing market of crypto currencies pegged to safe assets. Britain’s current regulatory limbo means local consumers and companies will miss out on some of the benefits of the technology, without being protected from its dangers.

UK authorities are dithering on how to manage the disruptions that stablecoins bring to the financial system. Fast-growing digital currencies like Tether are a way to transfer money while avoiding the cost or bother of dealing with banks and payment systems, with users’ funds backed by low-risk assets like bonds. The government is still trying to flesh out a legal framework - defining stablecoins, amending existing financial regulation, and assigning regulatory competence. That will most likely fall to the Financial Conduct Authority, with the Bank of England stepping in to oversee any stablecoin issuers that it sees as “systemic”.

UK regulators have already softened their initial, strict approach. The Bank of England suggested in 2023 that stablecoin issuers should only be backed by central bank accounts without remuneration. While that might have helped ensure that they were safe and redeemable on demand, it would have killed the sector’s business model, which is based on issuers of the tokens receiving the revenue generated by assets such as Treasury bills. The BoE has since dropped that demand.

The central bank is also suggesting other ways to control the growth of the stablecoin market. It wants to set a ceiling on the amounts individuals and businesses could hold - at between 10,000 and 20,000 pounds and 10 million pounds, respectively. The aim is to limit a deposit flight that would shrink the banking sector’s reserves, impair its profitability and reduce lending. The crypto industry argues, however, that such a move would be near-impossible to enforce.

There may be easier ways for the BoE to manage the risks. Transaction charges akin to negative rates could be slapped beyond a certain level of holding. In any case, in a country like the UK, where banking is relatively cheap, the probability of customers shifting their money en masse from banks to stablecoins is low.

The current legal limbo means that UK consumers can already buy foreign-issued coins, over which the Bank of England has little control, which leaves them exposed to risks. It could also mean that more transactions are done in dollar-denominated coins, complicating the BoE's monetary policy remit.

Chancellor Rachel Reeves has another good reason to promote pound-based coins. The global market could grow to $750 billion by 2030 - a conservative forecast. Based on the UK’s share of world GDP or the foreign exchange market, pound-based stablecoins could then amount to between $18 billion to $97 billion, according to an Imperial College report. Reeves, like her U.S. peer Scott Bessent, could then find a convenient pool of buyers for her government bonds. That’s another incentive for Britain to embrace change.

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CONTEXT NEWS

The UK Treasury said on September 22 that Chancellor of the Exchequer Rachel Reeves and U.S. Treasury Secretary Scott Bessent had agreed to set up a "Transatlantic Taskforce for Markets of the Future" to study "short-and-medium term cooperation on digital assets" and ways "to improve links" between both countries' financial markets.

Crypto firms in Britain could be exempted from rules that ensure financial services companies act with integrity and in the interests of customers, under new proposals outlined by the Financial Conduct Authority on September 17. The move comes after Britain said in April it would cooperate on the best approach towards digital assets with the United States, which has embraced the crypto industry and vowed to roll back regulatory curbs under President Donald Trump.