UK regulations will allow stablecoins and CBDCs to coexist, says former BoE fintech lead

A coordinated approach between the Treasury, the Bank of England (BoE) and the Financial Conduct Authority (FCA) could help the United Kingdom develop regulations that allow cryptocurrencies, stablecoins and central bank digital currencies (CBDCs) to coexist.

Cointelegraph spoke exclusively to Varun Paul, who formerly served as the head of Fintech at the BoE, about the U.K.’s efforts to establish regulations that support the use of cryptocurrencies and stablecoins while maintaining investor protection and financial stability.

Paul, now the senior director for CBDCs and financial market infrastructure at Fireblocks, says the U.K. is closing the gap with the European Union’s Markets in Crypto-Assets (MiCA), which he describes as the most advanced regulatory framework globally.

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“There was a period where the FCA said we’re not going to regulate crypto in any way because we don’t want to endorse it. As a result, the U.K. fell behind Europe, but it’s catching up fast,” Paul explains.

The U.K. Treasury published its final proposal in Oct. 2023, outlining its plans to regulate the sector, with companies offering cryptocurrency-related activities to be authorized by the FCA.

“You could see the latest set of publications as trying to position the U.K. level with the EU and encourage innovation so that London is seen as a Fintech center and a crypto hub. It’s recognition that the FCA, Treasury and the Bank of England can’t stay quiet on this subject any longer,” Paul adds.

Advantage of coordination

While the U.K. may have been slow in developing a framework that oversees the broader cryptocurrency space and the systemic role of stablecoins, Paul believes the country stands to gain from a cooperative regulatory approach.

The Fireblocks CBDC director says the development of regulations has been quicker in the country, given the U.K does not have to coordinate rules between different states like the EU has had to. The dovetail approach of the Treasury, BoE and FCA has also lent a hand in creating rules that balance fostering innovation and financial stability:

“Because of the coordination between those three authorities, it has the potential to be more comprehensive in giving a set of rules to facilitate stablecoins, allowing tokenized deposits for banks as well as central bank digital currencies.”

Paul highlights that the FCA’s regime currently oversees the management and use of stablecoins in the U.K. as well as smaller cryptocurrency and Fintech operators. Meanwhile, “larger, systemically important” operators would fall under the radar of the BoE and its Prudential Regulation Authority.

Stablecoins remain a base asset in the crypto ecosystem

Stablecoins have become an essential cog in the cryptocurrency ecosystem. Tether’s dollar-backed USDT’s market capitalization recently surpassed $100 billion, becoming the most used stablecoin worldwide.

Paul says that dollar-backed stablecoins continue to be used as a gateway to access the broader cryptocurrency ecosystem and will remain so until other blockchain-based digital forms of money are available that rival their ubiquity:

“Europe and the U.K. are saying we need to have a form of money denominated in euros and sterling, and we have the opportunity to say what that looks like.”

The transparency of Tether’s reserves for circulating USDT has often been criticized by mainstream commentators, and Paul says this narrative remains a concern for the U.K.’s regulators.

“From the very outset, the U.K. regime said if you’re going to call yourself a stablecoin, it must be redeemable at par and held in liquid assets. That’s something that the Financial Policy Committee and the Bank of England said many years back,” he adds.

Nevertheless, its policymakers are keenly aware of the demand for cryptocurrencies and digital money that can be used to purchase them, as Paul explains:

“Let’s have a regime that encourages a safe form of digital assets that’s backed by pounds rather than have a parallel to USDT in the U.K.”

What also needs to be considered is the use cases for stablecoins, tokenized assets and CBDCs between different institutions.

Stablecoins and CBDCs operating in tandem

Paul authored a white paper published in Nov. 2023 for Fireblocks, which considers the potential of a smart contract-managed system that allows a central bank to issue a CBDC as a base asset for commercial bank tokenized deposits and stablecoins.

The paper outlines how a country can have a consistent set of money, which protects and preserves this concept of uniformity. Paul says that users don't really mind what form of money they’re using, just like they don’t mind today that they’re using banknotes, credit cards or e-money.

Specific use cases will ultimately decide between the need for stablecoins and CBDCs. Crypto-natives may feel more comfortable using USDT, while older generations may lean toward centralized digital currencies issued by trusted financial institutions.

“Some people will be for the most trusted, risk-free money. Others will go for forms of money that allow them to enter DeFi, for example. Others use a particular digital currency to pay their taxes. For that reason, you will need and see various options integrating and working together,” Paul concludes.

Specific use cases will ultimately decide between the need for stablecoins and CBDCs. Crypto-natives may feel more comfortable using USDT, while older generations may lean toward centralized digital currencies issued by trusted financial institutions. 

The U.K's Economic Secretary to the Treasury, Bim Afolami, recently indicated that the government is working toward passing legislation regulating stablecoins and cryptocurrency staking by the end of 2024. 

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