Following the recent crypto crash came news the U.K. government would “legalize” stablecoins. Crypto supporters on Twitter took this to mean the leading reserved stablecoins – USDT and USDC – would become legal tender in the U.K.
But stablecoins don’t need to be legal tender to be used for payments. They don’t even need to be “legalized.” It’s perfectly legal for people in the U.K. to use USDC, USDT or any other stablecoin – including algorithmic stablecoins – and many people do.
Frances Coppola, a CoinDesk columnist, is a freelance writer and speaker on banking, finance and economics. Her book “The Case for People’s Quantitative Easing,” explains how modern money creation and quantitative easing work, and advocates “helicopter money” to help economies out of recession.
Currently, stablecoins are only used on crypto exchanges, not in mainstream payments systems. But it isn’t necessary to make them legal tender for them to be used for mainstream payments. The U.K. has a fast, cheap, comprehensive e-payment system to which banks are the gateways. The vast majority of payments in the U.K. use this system. Newer technologies such as PayPal can also be used for many retail purchases.
None of these payments involve legal tender. Debit cards, credit cards, bank transfers, checks, mobile money, PayPal – not one of these is legal tender in the U.K. In England, only banknotes and coins are legal tender, and low-denomination coins are only legal tender for amounts up to 20 pence (US25 cents). In Scotland, only coins are legal tender.
Merchants are not obliged to accept legal tender. In England, a 50 pound note is legal tender, but if you try paying for a bus ride with it, you’ll be told to get on your bike. But you can pay with a contactless debit card, which isn’t legal tender.
So as the Bank of England says, legal tender “has no use in everyday life.” It exists for one specific purpose only. Legal tender discharges a debt whether or not the creditor accepts it. The Bank of England also says that “if you offer to fully pay off a debt to someone in legal tender, they can’t sue you for failing to repay.”
Legal tender law dates from a time when people could be imprisoned for failing to pay their debts if creditors didn’t like the coin they offered. In the 19th century, London’s notorious Marshalsea Prison housed huge numbers of defaulted debtors, including people who had money. In Charles Dickens’s novel “Little Dorrit,” Amy Dorrit’s father was a long-term resident of Marshalsea because his debts were so numerous and complex that no one could work out how to pay them off.
These days, we no longer send people to the Marshalsea Prison for failing to pay their debts. But offering to pay in legal tender can still get a creditor off your back. However, both creditors and courts would much rather receive a bank transfer or debit card payment. Legal tender is a nuisance.
With physical cash going into terminal decline, you’d think that lawmakers would want to authorize other media of exchange as legal tender, wouldn’t you? But as payments work perfectly well whether or not legal tender is involved, and the vast majority of debts are settled without legal tender, there’s no urgency to update the laws.
So money doesn’t have to be legal tender to be used for mainstream payments. It just needs to be widely accepted. Making stablecoins legal tender may help to instill confidence in them, but far more important is regulating them so they are perceived as safe. The U.K. has a comprehensive system of regulation to ensure that electronic payments are safe. Bringing stablecoins into this system of regulation would encourage their widespread use.
And this seems to be what the U.K. government intends to do. A U.K. Treasury source quoted in The Telegraph newspaper said that “legislation to regulate stablecoins where used as a means of payment” would be included in the Finance and Markets Bill announced in the recent Queen’s Speech.
So for “legalize” read “regulate.” Using regulated stablecoins for mainstream payments could break the banks’ stranglehold on the U.K.’s payments system and potentially improve financial inclusion. But which stablecoins would qualify?
Read More: Regulating Stablecoins for What They Are
Well, USDT and USDC wouldn’t. The U.K. does not use the U.S. dollar, so it wouldn’t make any sense at all for these stablecoins to be used for mainstream payments within the U.K. And their issuers don’t currently issue stablecoins pegged to the British pound. If the U.K. explicitly encouraged merchants to accept GBP stablecoins, perhaps Circle and Tether might issue them.
But there’s another group of financial institutions that might issue regulated stablecoins for use in the British market: British banks. After all, they won’t want to lose control of the payments marketplace. And both Tether and Circle are foreign companies in the U.K. Tether is incorporated in Hong Kong, which is no longer a British colony, and Circle is based in Boston, Mass. If U.K. regulators favored stablecoins issued by Circle and Tether over stablecoins issued by U.K. banks, there would be heavy lobbying not just from the banks but from politicians and pundits determined to “keep payments British.”
And there is one further institution that might want to issue a regulated GBP stablecoin and indeed has been looking into doing so. That is the Bank of England. The U.K.’s legislative upper chamber, the House of Lords, recently cast shade on the idea, saying it was “a solution in search of a problem.” But if the future of payments is to be stablecoins, then the central bank will surely want to be in on the act.
So the U.K. is not proposing to make USDC and USDT legal tender. It’s not even proposing to “legalize” them, because they are already legal in the U.K. It’s proposing to regulate them. And that may mean they can never be used in mainstream payments systems in the U.K.
Rather than the open door to existing stablecoins that stablecoin aficionados thought this would be, it’s a qualified welcome for new GBP-pegged stablecoins from trusted British issuers – and an invitation to U.K. banks and the Bank of England to get on with issuing them.
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