The writer is the CEO of Innovate Finance, a fintech industry body
When the 2008 financial crisis shook the foundations of the global economy, it forced markets to adapt in ways few had imagined.
Out of that period of uncertainty, fintech emerged as a fresh, agile force that restored trust, delivered new infrastructure and reshaped how financial services operated. Harnessing and welcoming innovation became a cornerstone of the UK’s position as a global leader in finance.
Today, a new wave of change is building. Stablecoins — digital currencies pegged to the value of stable currencies such as the dollar — have the potential to reshape payments, savings and market infrastructure.
Alongside advances in digital assets and artificial intelligence, they offer the chance to modernise financial services, reducing cost and increasing speed, as well as introducing new functionality such as programmability.
Every institution in the UK, from regulators and the central bank to private banks and fintechs, will need to be in lockstep if we are to truly capitalise on this.
However, the UK is falling far short of its potential and is missing a critical opportunity to cement its current and future position as a world-leading financial services centre. The Bank of England’s commitment to traditional models of finance looks out of step while other jurisdictions embrace this transformation, and is at odds with the UK’s growth ambitions.
This cautious approach threatens to undermine the fintech ecosystem and the broader open approach to innovation that have driven the UK’s competitive advantage and leading reputation in financial services.
The stablecoin opportunity
With $237bn of stablecoin currently in global circulation, fintechs and governments of other nations have already begun taking advantage of this pioneering currency. Investors, fintechs and traditional finance firms are developing their stablecoin playbooks as they see the opportunity for cheaper, faster and safer services.
It is easy to see why. Stablecoins combine the efficiency of digital currencies with the stability of traditional money. Their cost savings, programmability and transparency make them suited to revolutionise everything from international payments and supply chain management to everyday customer transactions.
What the UK stands to lose
The rest of the world is marching on and taking advantage of the innovations this new currency brings. China, the US, Hong Kong, Singapore and the EU are all implementing regulatory regimes that support the development and establishment of stablecoins, while providing assurance to investors and consumers alike of their security.
As global financial infrastructure evolves, there is a real risk that the UK will fail to secure its seat at the table and retain its leading position in global financial services.
The UK has already ceded the early-adopter advantage. By doubling down on traditional banking rather than exploring the stablecoin opportunity, the UK is losing the chance to lead competitively on the world stage. This is damaging to investment in the UK and directly undermines the chancellor’s aim to make the UK the world’s most technologically advanced financial centre.
Urgent action
Despite this, we have a small window of opportunity to realise a second-mover advantage, learning lessons from first movers to deliver a regime that works. If the UK is not only to catch up with its global competitors, but also take advantage of its rich financial history, regulators must deliver a regulatory regime that takes into consideration three key objectives.
First, the UK should differentiate itself from other markets. It should incentivise business models not currently allowed elsewhere. For instance, businesses that offer interest or yield to customers who establish a direct commercial relationship with them should be encouraged as a differentiator from our competitors in Europe. However, we will only gain that second-mover advantage if we take the opportunity here and now.
International competitiveness should not come at the cost of fostering international openness, the second objective. The UK’s regime should allow the trading and use of overseas-issued and overseas-denominated stablecoins. The UK accounts for 40 per cent of FX turnover, trading in the dollar, and it can continue this legacy by becoming the euro-dollar market for stablecoins.
Finally, and arguably most importantly, regulators should support the development of UK-issued, GBP-backed stablecoins. To deliver this, they must avoid being overly prescriptive about the nature of the backing assets and the proportion of bank deposits within them.
The UK has a huge opportunity to set a distinctive approach to stablecoins and digital assets that is competitive, pro-innovation and provides the protections that investors and consumers want.
The UK built the best fintech community in the world, and cemented its financial services leadership, by recognising opportunities early, embracing innovation and acting boldly.
Stablecoins represent the next chapter of our sector, and progressive action is needed immediately if the UK is to maintain its world-leading position. As digital assets are set to form the foundation of the next wave of financial services, the UK must act quickly and decisively to secure its seat at the table. That time is now.