The United Kingdom needs to put in place a competitive and robust regulatory regime for stablecoins as soon as possible. Other large financial centres already have operational stablecoin regimes (e.g. the EU) or are poised to legislate one quickly (e.g. the US). The lack of a regulatory regime for stablecoins is undermining UK competitiveness and driving business away.
The UK is lagging far behind but there is still the opportunity to put in place a stablecoin regime that will be internationally competitive. By providing a clear and consistent environment for business growth, this regime will encourage innovation in UK financial services, boost UK financial markets, and directly contribute to economic, jobs and skills growth in the UK.
The growth and competitiveness potential includes:
- Payments: Stablecoins offer significant benefits to financial systems, enabling faster, cheaper, and more efficient payments – both domestically and internationally. For retail users, they can reduce transaction costs, improve access to financial services, and support greater financial inclusion, particularly for underserved populations.
- Artificial Intelligence (AI): Stablecoins will play a crucial role in realising the ambitions of the UK’s AI Action plan by providing a stable and reliable medium for transactions, enabling AI agents to handle payments, manage financial assets and complete smart contracts and automated transactions efficiently and safely.
- Tokenised securities and funds: Stablecoins are also essential for a functioning digital securities and tokenisation markets, where there needs to be a digital settlement asset. The total market for tokenised assets is predicted to be 10% of global GDP by 2030. A UK-compliant and potentially GBP-backed stablecoin as the digital settlement asset will keep value and flow in the UK and support local market participants.
- Priority sectors in the Government’s Financial Services Competitiveness and Growth Strategy: Insurers and asset managers are utilising stablecoins for transactions and settlement and this will increasingly be a competitive edge for all key UK strategic financial services sectors, especially any with cross-border transactions: sustainable finance, insurance and reinsurance markets, capital markets and asset management as well as FinTech.
- Gilts: HM Treasury’s “DIGIT” project to issue a digital gilt instrument using distributed ledger technology (DLT) will only take off if stablecoins can be used for settlement. Equally, UK issued stablecoins can strengthen the UK economy and public finances, with stablecoin issuers becoming significant buyers of UK debt (e.g. Tether is now the 7th largest buyer of US government debt).
- Eurodollar 2.0: The UK could become the ‘Eurodollar market’ for stablecoins. With global stablecoin markets already valued at $200bn and growing rapidly, and with GBP the 4th most traded currency in the world and London taking 40% of foreign exchange (FX) turnover, it does not seem unreasonable for the UK to host 10-20% of the future global stablecoin market, i.e. $20-40bn and growing.
In order to secure these benefits for the UK, we need a clear and compelling UK stablecoin strategy to guide the regulators on rapid implementation. It is critical that the legal basis for the UK regulatory regime does not rule out and can enable the development of these. This regime should have three objectives to turn the UK into the most competitive location for stablecoin activity:
- Support the development of UK-issued GBP-backed stablecoins
- Foster international openness
- Incentivise business models
The fundamental principle behind this regulatory regime is that stablecoins are effectively safe from a financial stability and consumer usage point of view so long as they are 1:1 backed at all times with HQLA, convertible and redeemable at par as necessary, and with frequent audit and disclosure to the market and regulators. The aim of the regulatory design explained in this paper is to ensure these conditions.
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