Crypto: Will UK banks adopt CBDCs and stablecoins?

Watch: Fireblocks director and former fintech head of Bank of England talks about CBDCs and stablecoins

UK banks could issue stablecoins that are then listed on crypto-exchanges such as Binance and Coinbase, the director of central bank digital currency (CBDC) and market infrastructure at Fireblocks has claimed.

Varun Paul, a former head of fintech at the Bank of England, tells Yahoo Finance's The Crypto Mile that the UK's digital finance infrastructure is evolving to "take the lead globally".

He said: "In the UK we're going to see retail bank issued stablecoins, and maybe non-bank issued stablecoins from fintechs, alongside those existing stablecoins, such as Binance USD (BUSD-USD), USDC (USDC-USD) and USDT (USDT-USD).

"All these digital assets could then co-exist in time with a CBDC from the Bank of England."

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When asked if these retail bank issued stablecoins could subsequently be listed on exchanges like Binance or Coinbase (COIN), Paul added: "I think that's exactly what we'll see, I think we're moving towards a digital asset ecosystem in many forms and these assets are all going to interact."

What is a stablecoin?

Stablecoins were spawned in the cryptocurrency ecosystem, and are designed to minimise the price volatility of its value relative to a stable asset, such as the US dollar, or the UK pound.

Crypto-traders usually park their profits or losses into stablecoins when wanting to take a break from the high volatile/ high risk digital assets, such as bitcoin, cardano and ethereum.

Because the most popular stablecoins are pegged to the US dollar, they actually contribute to dollar hegemony in global markets.

The UK's ambition to become a global crypto hub

Paul said the topography in the UK is primed and ready for more efficient digital financial systems.

He highlighted Wednesday's consultation published by the UK Treasury on regulating crypto assets. It acknowledges that regulating crypto and digital assets in the UK may need an adapted and upgraded approach.

Under the new approach existing legislation will be adapted to apply to crypto-exchanges, stablecoins and cryptocurrency issuance, and custodial factors for digital assets.

This means rules for crypto will closely mirror those applied to traditional finance entities and will likely subject them to all the prudential, consumer protection, disclosure and operational resilience requirements that finance must operate under frameworks where digital assets and currencies can interoperate, move from one chain to another and from one country to another.

Speaking about the consultation, Paul said: "This is undoubtedly a positive step and the UK has a great opportunity to take a lead globally on digital assets.

"Banks and fintechs increasingly see digital assets as a necessity to drive improvements in financial services.

"But the high-profile casualties in the crypto industry last year mean that everyone is looking for clear rules that protect consumers and market participants, while supporting innovation.

"The new regulatory regime will help the UK to build on its existing strength as a global capital for financial services and fintech and nurture the innovation that has already been happening in the UK."

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UK prime minister Rishi Sunak has articulated his eagerness to boost the UK's standing as a hub for digital assets, distributed ledger technology and cryptocurrencies.

In April 2022, when Sunak was chancellor, he elaborated on a plan to make the UK “a global crypto asset technology hub”, where alongside former economic secretary to the Treasury John Glen, he laid out a roadmap for the UK’s crypto future.

This included the development of new legislation for a "financial market infrastructure sandbox" that can aid crypto-firms to innovate.

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Referring to the new UK prime minister's enthusiasm for digital assets, Paul added: "The political wind is certainly in favour of developing the UK as a crypto hub.

"I think we're going to see a whole ecosystem and a coherent framework in the UK that incorporates CBDCs, stablecoins, crypto assets, tokenised assets, decentralised finance (DeFi) and NFTs in a whole new financial architecture that will be an opportunity for the UK to take the lead globally."

UK could support stablecoins pegged to the pound

In January Conservative MP Andrew Griffith, economic secretary to the Treasury, briefed the UK government's Treasury Committee on the latest crypto-asset developments.

Griffith said the government hoped to embrace the disruptive technology behind crypto assets such as bitcoin (BTC-USD), ethereum (ETH-USD) and cardano (ADA-USD).

He added that there was "a very wide range of forecasts in the market that reveal the benefits to the UK economy from embracing crypto assets and its underlying technology, such as distributed ledger technology and blockchain."

Griffith also spoke about a possible UK government supported stablecoin. We asked Varun Paul if these stablecoins, if ever they were to be created, would differ from a Bank of England CBDC.

Paul outlined a possible method with which the UK government might allow stablecoins, to be regulated and incorporated into finance.

"You can have a wholesale stablecoin with the permission of the government and with a connection to the central bank, but issued by a third party.

"And there are plans for that to come into play this year. There's a company called Finality that was given approval at the end of last year to create wholesale stablecoins for settlement between banks."

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However, he added that no decision has been made just yet on when a Bank of England CBDC will be released, adding that it will take some time to get to a point where a central bank issued digital pound is ready for release.

"What we will certainly see before then is a proliferation of stablecoin activity. And what the government has said they're going to do is set out the rules for these stablecoins this year" he added.

He said that the digital asset industry and regulation will work together properly in 2023, resulting in a boost of confidence in the sector.

"Over the last few months, we've also seen a bit of a shakeout in the crypto industry, which has made people a lot more nervous and and clearly asking for more regulation, more clarity from the authorities.

"So I think this is the year where we see this coming into play and the two coming together properly. And I think that's when the whole digital asset industry is going to really kick in."

What are CBDCs

CBDCs are digital versions of a country's fiat currency, issued and backed by the central bank of that country.

Unlike cryptocurrencies, CBDCs are not decentralised and are not based on a blockchain. Instead, they operate as a digital representation of a country's currency and are typically intended to be used as a means of payment in the same way as physical banknotes and coins.

CBDCs are still in the development and trial phase in many countries, with a few countries having launched pilot programs and some having plans to launch a CBDC in the near future.

They can come in two forms, wholesale CBDCs that are exchanged between intermediary banks, and retail CBDCs that are exchanged directly between a nation's central bank and normal people, who would then have a digital wallet to hold their digital currencies.

The European Central Bank (ECB) is also actively exploring the potential of issuing a digital version of the euro – a CBDC. But the development is still in the early stages and it remains to be seen when, or if, such a currency will be issued.

The UK's consultation on crypto and digital assets

UK's Treasury consultation paper mentions four primary policy goals: to promote growth, innovation and competition, inform consumers of risks, maintain financial stability, and preserve market integrity. It also outlines guiding principles for regulation of crypto-assets.

In the document the UK government claims that it intends to remain technology-neutral, weighing both the potential risks and opportunities posed by blockchain technology and its use cases.

The Treasury added that it plans to adopt an activities-based approach to regulation, that will focus on areas with the most pressing risks and opportunities.

The approach is meant to align with the Future Regulatory Framework established by the Financial Services and Markets Bill 2022.

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