UK opens the stablecoin door

Hello and welcome to the latest edition of the FT Cryptofinance newsletter. This week, we’re taking a look at the UK’s big to regulate stablecoins.

Part of a regulator’s job is to look around the market and work out what powers it will need if something big happens in the future, like an important bank or asset manager blowing up.

This “horizon scanning” is often applied to financial innovations that the authority anticipates will require oversight and rules once the innovation is widely used. 

A worthy exercise but it can quickly waste a regulator’s resources and sap its enthusiasm if the thing you’re looking at never breaks into the mainstream. I should know. In a tedious and mercifully brief phase of my early working life this was my job.

This memory came to mind this week as the UK set out guidelines to regulate stablecoins, the digital tokens that are pegged to sovereign money.

They are akin to an international currency such as the dollar or even the old Spanish pieces of eight: a form of money that can be used for transactions in the borderless crypto world, but without the hassle of leaving a digital trail in traceable bank accounts.

The Bank of England and Financial Conduct Authority set out proposals on Monday to bring stablecoins into the economy as a viable means of payment for everyday goods and services.

The FCA’s Sheldon Mills said stablecoins could make payments “faster and cheaper”, while the Bank’s Sarah Breeden said stablecoins could “enhance digital retail payments”.

The two regulators have slightly different remits: the FCA is proposing to look at regulation of companies that issue stablecoins while the Bank is proposing to chiefly look at how it would regulate operators of payment systems that use them.

My question was simply: why? In this I wasn’t alone. “These proposals are not the result of any retail consumer demand insofar as I am aware,” said Harvey Knight, UK head of the financial services regulatory group at Withers.

A person familiar with the matter said no existing stablecoin would even fall within the Bank’s regime today, as they are predominantly used for crypto payments rather than everyday retail consumer spending. 

It’s also difficult to imagine what problem stablecoins solve for UK consumers, the majority of whom are used to instant digital payments with through contactless credit and debit cards.

“The UK already has an efficient payments infrastructure to handle domestic retail payments so the need for stablecoins . . . is not convincing,” Arun Srivastava, partner at Paul Hastings, told me. 

“With consumers content with the relative speed and remittance of more traditional payment methods, together with the complexity of cryptocurrency, it may take some time before fiat-backed stablecoins can become a widespread form of consumer payment,” added Hannah Ross, financial services regulation lawyer at Pinsent Masons.

Taking a broader view, there are only five stablecoins with more than $1bn worth of tokens in circulation and none of them call the UK their home.

Tether, which manages $86bn worth of eponymous tokens, dominates the market, followed by USDC, run by US company Circle. But that token has been haemorrhaging market share ever since Circle declared a $3.3bn exposure to the now-collapsed Silicon Valley Bank. The rest of the top five include a Binance-branded stablecoin that has faded to insignificance ever since it fell foul of New York regulators this year.

So, what’s left? Well, it’s well known that foreign exchange payment and settlement systems aren’t all they could be.

“I highlight foreign exchange because it is the worst part of the established financial system today,” said Varun Paul, who spent 14 years at the BoE before becoming director of market infrastructure at blockchain platform Fireblocks.

A “sterling stablecoin would enable someone to send money from the US to the UK, the Philippines to the UK, or wherever else, using blockchain rails that are cheaper and faster”.

True, but it’s not certain a UK stablecoin (Britcoin?) will even see the light of day, let alone get to the point where it could be a viable option for cross-border payments at any meaningful scale. 

Even so, there is a chicken-and-egg issue, as Paul noted. Without legal guidelines, most people won’t use it.

And as an exercise, you never know. There may come a point when UK regulators wished they had certain powers to intervene, or had had better foresight.

What’s your take on the UK’s stablecoin proposals? As always, email me at scott.chipolina@ft.com. 

Weekly highlights

• Ghosts from the past: Lender Celsius Network won court approval for a restructuring plan that will allow it to exit bankruptcy and return money to customers, who have been waiting since July last year. The new Celsius is being run by a consortium that includes Arrington Capital and calls itself Fahrenheit. But of course.
  Meanwhile, there have been rumours that the FTX exchange will also be resurrected from the dead; the FTT token at the heart of FTX’s collapse doubled in value this week to $2.84, but still a long way from the now infamous $22 price FTX’s old management offered to pay for it.

• The company behind the Bored Ape Yacht Club series said that UV light emitting from a show it hosted in Hong Kong last week was the likely cause of the “eye burn” several attendees suffered. “We continue to encourage anyone experiencing symptoms to seek medical attention,” it said on Thursday.

• The US continued its unrelenting blitz against crypto when lawmakers Zach Nunn (R-Iowa) and Abigail Spanberger (D-VA) co-authored a bill seeking to prohibit the US government’s exposure to the “blockchain-based services network of the People’s Republic of China”. On the list, the bill name-drops Ifinex, the Hong Kong-based parent company behind the largest stablecoin issuer in the world: Tether.  

Soundbite of the week: Former CFTC chief slams US policy on crypto

Chris Giancarlo, former chair of the Commodity Futures Trading Commission, the main US derivatives regulator, spoke at the FT’s Global Boardroom event this week. A supporter of the possibilities of crypto, he wasn’t a fan of the gridlock in Washington.

“If you look just what’s happened in the last week, [the UK] coming out with a paper that intends to make the UK the centre of crypto activity in the globe, the EU is busily implementing the Mica legislation, so two of our biggest economic competitors are not following this administration’s approach of trying to suppress crypto. They’re actually taking advantage of the suppression of crypto here in the United States to advance their economic interests.” 

Incidentally, this week the CFTC said that 49 per cent of the enforcement actions it brought in its financial year to September had involved digital assets.

Data mining: Growing hopes for a US spot ethereum ETF

The price of bitcoin shot up again this week to almost $38,000 on hopes that BlackRock, the US asset manager, will get regulatory approval to launch a cash bitcoin exchange traded fund, a US stock market vehicle that invests directly in bitcoin.

Late on Thursday BlackRock went a stage further, with a filing to list a cash ETF that invests directly in ethereum, the second-largest cryptocurrency.

Ethereum is slightly different from bitcoin in that it is more commonly used as the building blocks for other crypto projects.

Predictably, the ethereum price soared on the news, up 10 per cent in the minutes afterwards. The pressure on the SEC for crypto ETFs isn’t going to let up anytime soon.

FT Cryptofinance is edited by Philip Stafford. Please send any thoughts and feedback to cryptofinance@ft.com.