No, the UK will not make USDC and USDT legal tender

FAfter the recent crypto crash, the UK government was going to “legalize” stablecoins. Crypto proponents on Twitter took this to mean the major reserved stablecoins – USDT and USDC – would become legal tender in the UK


— Kyle Chasse (@kyle_chasse) May 17, 2022

But stablecoins do not need to be legal tender to be used for payments. They don’t even need to be “legalized”. It is perfectly legal for people in the UK to use USDC, USDT or any other stablecoin – including algorithmic stablecoins – and many people do.

CoinDesk columnist Frances Coppola is a freelance writer and speaker on banking, finance, and economics. His book “The case for popular quantitative easingexplains how modern money creation and quantitative easing work, and advocates “helicopter money” to help economies emerge from recession.

Currently, stablecoins are only used on crypto exchanges, not in traditional payment systems. But they do not have to be legal tender to be used for current payments. The UK has a fast, cheap and comprehensive electronic payment system to which banks are the gateways. The vast majority of payments in the UK use this system. New technologies such as PayPal can also be used for many retail purchases.

None of these payments are legal tender. Debit cards, credit cards, bank transfers, cheques, mobile money, PayPal – none of these are legal tender in the UK In England, only banknotes and coins are legal tender, and coins of low value are legal tender only for amounts 20 pence (US25 cents). In Scotland, only coins are legal tender.

Read more: Why Stablecoin Interest Rates Are So High

Merchants are not obliged to accept legal tender. In England a £50 note is legal tender, but if you try to pay for a bus ride with it you will be told to get on your bike. But you can pay with a contactless debit card, which is not legal tender.

So, as the Bank of England puts it, legal tender “has no use in everyday life”. It exists for one specific purpose. Legal tender erases a debt, whether the creditor accepts it or not. The Bank of England also states that “if you offer to repay a debt in full to someone who is legal tender, they cannot sue you for non-payment”.

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 infamous Marshalsea Prison housed a large number of defaulting debtors, including people with money. In Charles Dickens’ novel “Little Dorrit”, Amy Dorrit’s father was a longtime resident of Marshalsea because his debts were so numerous and complex that no one could figure out how to pay them off.

These days we no longer send people to Marshalsea Prison for non-payment of their debts. But offering to pay in legal tender can still get rid of a creditor. However, creditors and courts would much prefer to receive a wire transfer or debit card payment. Legal tender is a nuisance.

With cash in terminal decline, you would think lawmakers would want to allow other means of exchange as legal tender, right? But since payments work seamlessly whether legal tender or not, and the vast majority of debts are settled without legal tender, there is no rush to update the laws.

Thus, the money does not need to be legal tender to be used for current payments. It just needs to be widely accepted. Ensuring that stablecoins are legal tender can help instill trust in them, but it is far more important to regulate them so that they are perceived as safe. The UK has a comprehensive system of regulations to ensure the security of electronic payments. Bringing stablecoins into this regulatory system would encourage their widespread use.

And that seems to be what the UK government intends to do. A UK Treasury source quoted in The Telegraph newspaper said that “legislation to regulate stablecoins when 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”. The use of regulated stablecoins for traditional payments could break banks’ grip on the UK payments system and potentially improve financial inclusion. But which stablecoins would be eligible?

Read more: Regulating Stablecoins for what they are

Well, USDT and USDC wouldn’t. The UK does not use the US dollar, so it would not make sense for these stablecoins to be used for traditional payments in the UK. And their issuers do not currently issue sterling-pegged stablecoins. If the UK explicitly encouraged merchants to accept GBP stablecoins, perhaps Circle and Tether could issue them.

But there is another group of financial institutions that could issue regulated stablecoins for use in the UK market: UK banks. After all, they won’t want to lose control of the payments market. And Tether and Circle are foreign companies in the UK. Tether is incorporated in Hong Kong, which is no longer a British colony, and Circle is based in Boston, Mass. If UK regulators favored stablecoins issued by Circle and Tether over stablecoins issued by UK banks, there would be intense lobbying not only from banks, but also from politicians and pundits determined to “maintain the British payments”.

And there is another institution that might want to issue a regulated GBP stablecoin and has actually considered doing so. It’s the Bank of England. The UK’s upper legislative house, the House of Lords, recently threw shade at the idea, saying it was “a solution in search of a problem”. But if the future of payments is to be stable, the central bank will surely want to be part of it.

The UK therefore does not propose to make USDC and USDT legal tender. He doesn’t even suggest ‘legalizing’ them, as they are already legal in the UK. He proposes to regulate them. And that may mean they can never be used in traditional payment systems in the UK.

Rather than the open door to existing stablecoins that stablecoin aficionados thought it would be, it’s a qualified welcome for new GBP-pegged stablecoins from trusted UK issuers – and an invitation to UK banks and the Bank of England to continue issuing them.

Read more: What is the interest of stablecoins? Understand why they exist

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