UK rules allow stablecoins and CBCCs to co-exist, former BoE fintech chief says.

A coordinated approach between Her Majesty's Treasury, the Bank of England (BoE) and the Financial Conduct Authority (FCA) could help the UK develop regulations to allow cryptocurrencies, stablecoins and central bank digital currencies (CBDCs).

Cointelegraph spoke exclusively to Varun Paul, formerly head of fintech at the BoE, for the UK's efforts to establish regulations that support the use of cryptocurrencies and stablecoins while maintaining investor protection and financial stability.

Paul, currently executive director of CBDCs and financial market infrastructure at FireBlocks, said the UK is closing the gap with EU markets with the Crypto-Assets Regulation (MiCA), which he described as the most advanced regulatory framework globally.

Related: FTX collapse, Binance's US settlement presents strong case for MiCA regulations

“There was a time when the FCA should not regulate crypto in any way because we don't want to support it. As a result, the UK is lagging behind Europe but is catching up fast,” explains Paul.

The UK Treasury published its final proposal in October 2023, outlining its plans to regulate the sector, proposing that companies be licensed for cryptocurrency-related activities by the FCA.

“The latest set of publications is an attempt to align the UK's status with the EU and encourage innovation to position London as a fintech and crypto hub. It is an acknowledgment that the FCA, the Treasury and the Bank of England cannot remain silent on this subject,” added Paul.

The benefit of coordination

While the UK may be slow to develop a framework to regulate the broader cryptocurrency space and the role of a stablecoin system, Paul believes the country could benefit from a more collaborative regulatory approach.

The CBCC director of FireBlocks said the development of regulations was rapid in the country as the UK did not have to coordinate laws between different jurisdictions such as the EU. The Treasury, BOE, and FCA have joined forces to create rules that strike the balance between dovish innovation and financial stability.

“Because of the coordination between those three authorities, it has the potential to be more complete by allowing banks and central banks to deposit tokenized digital currencies, by providing regulations to facilitate stable coins.”

Paul said the FCA regime currently oversees the management and use of stablecoins in the UK and highlights small cryptocurrency and Fintech operators. Meanwhile, “large, strategically important” operators fall under the radar of the BOE and prudential regulatory authorities.

Stablecoins remain a fundamental asset in the crypto ecosystem.

Stablecoins have become an important cog in the cryptocurrency ecosystem. The capitalization of Tether (USDT) recently exceeded 100 billion dollars, making it the most used stable coin in the world.

Paul believes that dollar-backed stablecoins will continue to be used as a gateway to access the broader cryptocurrency ecosystem, and will remain so until other blockchain-based digital currencies compete for ubiquity:

“Europe and the UK are saying we should have a currency denominated in euros and sterling, and we have an opportunity to say what that looks like.”

The transparency of Tether's reserves for circulating USDT has often been criticized by mainstream analysts, and Paul said this narrative is a concern for UK regulators.

From the outset, if you want to call yourself a stable coin, the UK sovereign must be stable and backed by liquid assets. It's something that the Financial Policy Committee and the Bank of England said many years ago,” he added.

However, policymakers are well aware of the need to buy cryptocurrencies and digital money, as Paul explains:

Instead of paralleling USDT in the UK, let's have a regime that promotes secure digital assets backed by the pound.

Something to consider is the use cases for stablecoins, tokenized assets and CBDCs among different institutions.

Stablecoins and CBDCs working together

Paul wrote a white paper published for Fireblocks in November 2023, considering the potential of a smart contract-managed system that would allow the central bank CBCC to provide commercial bank tokenized deposits and stablecoins.

The paper outlines how a country can have a uniform set of currencies, which preserves and protects this concept of unity. Pol users don't care what kind of money they use, just like today they don't care whether they use banknotes, credit cards or e-money.

Specific use cases will ultimately decide between the importance of 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 get very honest, risk-free money. Others are looking for forms of money that will allow them to enter DeFi [decentralized finance], example. Others use a specific digital currency to pay their taxes. Because of this, you need and will look at different options when you're putting together and working together.

Specific use cases will ultimately decide between the importance of 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 United Kingdom Treasury's Economic Secretary Bim Afolami has indicated that the government is working to introduce legislation to regulate stablecoins and cryptocurrency stakes by the end of 2024.

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