After the recent crypto crash, news broke that the UK government would "legalize" stablecoins. Crypto advocates on Twitter took this to mean that the leading reserved stablecoins - USDT and USDC - would become legal tender in the UK.
But stablecoins don't have to be legal tender to be used for payments. They don't even have to be "legalized." It is perfectly legal for people in the U.K. to use USDC, USDT or other stablecoins - including algorithmic stablecoins - and many people do.
Frances Coppola, a columnist for CoinDesk, 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 recessions.
Currently, stablecoins are only used on crypto exchanges, not in traditional payment systems. However, it is not necessary to make them legal tender for them to be used for regular payments. The UK has a fast, cheap and comprehensive electronic payment system where banks are the gateways. The vast majority of payments in the UK are made through this system. Newer technologies such as PayPal can also be used for many retail purchases.
None of these payments use a legal tender. Debit cards, credit cards, bank transfers, checks, mobile money, PayPal - none of these are legal tender in the UK. In England, only banknotes and coins are legal tender, and low-denomination coins are legal tender only for amounts up to 20 pence (25 U.S. cents). In Scotland, only coins are legal tender.
Merchants are not required to accept legal tender. In England, a 50-pound note is legal tender, but if you want to use it to pay for a bus ride, you will be asked to get on your bike. You can, however, pay with a contactless debit card, which is not legal tender.
As the Bank of England says, legal tender has "no use in everyday life." It exists only for a specific purpose. Legal tender discharges a debt whether or not the creditor accepts it. The Bank of England also says, "If you offer to pay someone a debt in full with legal tender, they can't sue you if you don't pay them back."
The legal tender law dates back to a time when people could be jailed for not paying their debts if creditors didn't like the coin they offered. In the 19th century, London's notorious Marshalsea Prison imprisoned many delinquent debtors, including people who had money. In Charles Dickens' novel "Little Dorrit," Amy Dorrit's father served a long time in the Marshalsea because his debts were so numerous and complicated that no one knew how to pay them.
These days, we don't send people to Marshalsea Prison if they don't pay their debts. But offering to pay with a legal tender can still get a creditor off your back. Both creditors and the courts, however, would much rather receive a wire transfer or debit card payment. Legal tender is a nuisance.
As physical cash becomes less and less important, you would think that legislators should allow other means of exchange as legal tender, right? But since payments work perfectly well without legal tender and the vast majority of debts are settled without legal tender, there is no urgency to change the laws.
So money does not have to be legal tender to be used for common payments. It just needs to be widely accepted. Introducing stablecoins as legal tender can help build trust in them, but more importantly, regulating them so that they are perceived as safe. The UK has a comprehensive regulatory system in place to ensure the security of electronic payments. Including stablecoins in this regulatory system would encourage their widespread use.
And that seems to be exactly what the UK government intends to do. A source from the UK Treasury, quoted in The Telegraph newspaper, said that "legislation to regulate stablecoins when used as a means of payment" will be included in the Finance and Markets Bill announced in the recent Queen's Speech.
So for "legalize," it's "regulate." Using regulated stablecoins for regular payments could break the banks' stranglehold on the U.K. payments system and improve financial inclusion. But which stablecoins would qualify?
Well, USDT and USDC would not. The U.S. dollar is not used in the U.K., so it wouldn't make any sense at all to use these stablecoins to make common payments within the U.K. And their issuers do not currently issue stablecoins pegged to the British pound. If the UK explicitly encouraged merchants to accept GBP stablecoins, Circle and Tether might issue them.
But there is another group of financial institutions that could issue regulated stablecoins for the UK market: British banks. After all, they don't want to lose control of the payments market. And both Tether and Circle are foreign companies in the UK. Tether is based in Hong Kong, which is no longer a British colony, and Circle is based in Boston, Massachusetts. If British regulators favored stablecoins issued by Circle and Tether over stablecoins issued by British banks, there would be strong lobbying not only from the banks, but also from politicians and pundits determined to "keep payments British."
And there is another institution that might want to issue a regulated GBP stablecoin and has already considered doing so. That is the Bank of England. The UK's legislative upper house, the House of Lords, recently rejected the idea as "a solution in search of a problem." But if the future of payments is in stablecoins, the central bank will certainly want to be in on the game.
So the UK is not proposing to make USDC and USDT legal tender. It is not even proposing to "legalize" them, because they are already legal in the UK. And that could mean they can never be used in mainstream payment systems in the UK.
Instead of the open door for existing stablecoins that stablecoin enthusiasts had expected, this is a qualified welcome to new GBP-linked stablecoins from trusted UK issuers - and an invitation to UK banks and the Bank of England to start issuing them.