Over the centuries, the concept of ‘money’ has continued to evolve – from bartering, to bank notes to bitcoin.
During this time, London has emerged as a powerhouse in the foreign exchange market, accounting for almost 40% of all global trading.
Today, the UK is well placed to become a global leader in the future of digital assets and to set the pace in the rapidly expanding stablecoins market, set to be worth £300 billion globally in 2026.
Or at least it would be if it wasn’t for that most British of pastimes: suffocating innovation with overregulation.
Stablecoins are pegged to established currencies, such as the pound and dollar, to reduce volatility but the Bank of England’s approach, until recently, has been one of excessive caution.
This has left Britain falling behind in a highly competitive race to grab a slice of a rapidly expanding global market.
Just last year, Bank of England governor Andrew Bailey was still ‘waiting to be convinced’ of the case for the currency even as Donald Trump was signing off the GENIUS Act, bringing in America’s federal framework for dollar-backed stablecoins.
While the Bank of England has remained stubbornly attached to its unloved ‘digital pound’ concept, it has been woefully slow to embrace the transformative opportunities of cryptocurrency more broadly.
Systemic stablecoins are fast, efficient and borderless. The US, Asia, Gulf States and even the European Union have been quicker to react to their potential than the UK.
In frustration, Reform UK’s leader Nigel Farage last year took aim at the ‘dinosaur bureaucrats’ at the Bank of England who seemed determined to stifle innovation and growth.
And his words seem to have had some impact on thinking at Threadneedle Street.
The Bank has published revised proposals for a systemic stablecoins regulatory framework that are a step in the right direction.
They grant issuers access to a deposit account at the Bank where they can hold a portion of their backing assets in short-term UK government debt.
The framework also proposes putting in place liquidity arrangements to help backstop an issuer’s ability to monetise those assets if needed.
The current proposed cap for issuers is to use 60% of the cash to purchase short-term UK government debt, which pays a guaranteed rate of interest. The remaining 40% must be held in accounts at the Bank.
This marks a major shift from a no-revenue to a cash-generating model.
But there is still more that must be done – staring with raising the 60% cap.
The Bank must also remove the asset holding cap of £20,000 for individuals and £10 million for businesses.
Farage has branded these limits a ‘poison pill for the UK financial sector’ designed to crush innovation.
Reform want to see a framework to allow for privately issued, well-regulated sterling stablecoins to boost the UK economy and channel demand into UK government debt.
That means not only lifting the cap on holding assets, but also reducing capital gains tax on stablecoins, as well as other crypto-assets, to encourage investment.
Of course it is the Bank’s job to ensure, as it states in the new proposals, the ‘public can have the same trust in new forms of money as they do existing ones’.
But there are only two choices facing Britain when it comes to systemic stablecoins – do they want to gain from this rapidly growing market or lose out?
We need to ensure UK-based stablecoin issuers can launch and scale up but currently proposals may be so capital and compliance intensive that no domestic issuers enter the market.
Across the world, regulation is aligning with innovation. Asian markets are establishing payments-first licensing and reserve and redemption standards, while the EU is authorising e-money and asset referenced tokens across member states.
And market leaders like J.P. Morgan’s JPM Coin, Ripple’s USD stablecoin and pilots from Mastercard and Visa, are leading the way in showing how stablecoins can move into consumer, merchant and institutional payments.
This week, the Payments Association hosts PAY360 at the Excel centre. This is the UK’s largest payments event with thousands of banks, payment providers and policymakers considering how Britain can continue to lead the world in global trading.
The window is closing, but Britain can still act swiftly to become a digital assets destination and pave the way for faster and cheaper retail and wholesale payments.
Fast, efficient, borderless. Stablecoins, the fourth generation of money, are transforming the way we pay.
Britain can lead this transformation or be forced to adapt to a world shaped by others.
The Bank still needs to be bolder, to act swiftly and think about sterling-backed stablecoins not just as a risk to be managed but as a safe, dynamic and internationally competitive digital currency.
It is true that we are evolving from our ‘digital dinosaur’ status, but whether we can evolve fast enough to avoid extinction in a fiercely competitive market, remains to be seen.
