On 4 April, the UK government announced plans to establish the country as a “global hub” for the crypto industry. Part of the plan is the regulation and integration of stablecoins into the economy, though the specifics are not yet known.
One of the most appealing, and controversial, aspects of cryptocurrencies has been the apparent lack of governmental oversight. Proponents have claimed that, thanks to the blockchain, there would be no need for nations to carefully manage cryptocurrencies thus avoiding stifling bureaucracy and inefficiency.
Regulating stablecoins would be a reversal of this trend, begging the question; what is going to happen next?
What Is A Stablecoin?
That question for muddied by the question of what a stablecoin is. “This is something that is debated,” says Dr. Garrick Hileman, head of research at Blockchain.com. “There are three broad kinds of stablecoins, the US-dollar or Fiat pegged stablecoins, crypto collateralized stablecoins that are backed by other crypto assets, and a third kind starting to emerge called algorithmic stablecoins which have their value set and managed by an algorithm.”
Other stablecoins have their values pegged to gold and, in the case of the Petro, the value of a barrel of oil made in a specific part of Venezuela.
“The various instruments developed in the crypto space are notoriously volatile.” Dr. Hileman continues. In the 13 years since it was first launched, the value of a bitcoin has fallen by over 80% three times with the rest of the market being just as unstable. Part of the problem is that Bitcoins and many other cryptocurrencies are unbacked he explains, “[This means] that you can’t redeem a bitcoin for some kind of asset or collateral that helps stabilize its value.”
Stablecoins were developed as a solution to that problem with the first example, Tether (USDT), pegging its value to the US dollar. In doing so, Tether’s value became much more stable and it could help provide a method for converting unbacked cryptocurrencies into fiat currency. It is also joined by USD Coin (USDC).
Though stablecoins are not as prolific as their more volatile counterparts, UK-based companies dealing in cryptocurrencies and working with blockchains are looking at the announcement with nervous excitement.
Stablecoins In The UK
Alex Moss, director of the Manchester-based online marketing company Firecask, looks forward to the details of what the Treasury will do. As a large part of his business comes from NFTs from across the world, with only 10% originating in the UK, he has to deal with currency conversions both from crypto to fiat and from US dollars to pounds.
“Right now, when someone pays me in a cryptocurrency, there are so many hurdles to get that cash into my Santander bank account, so many necessary procedures that could be more seamless”, he says.
The current process sees him convert cryptocurrencies into a stablecoin, typically USDC, into fiat currency, and finally into pounds.
Moss describes that problem from his perspective: “Let’s say, I get $100,000 in USDC. I know it’s currently worth £160,000 today. Where do I take it? Binance, Coinbase, somewhere else? And then, I have to try and get it to the fiat level. And even then, do I get it done straight to GBP to USDC? If so, what’s the implication of doing that from USDC to USD and then using something like Transferwise and doing the currency exchange there?”
He hopes that the regulatory framework that HMRC might establish might smooth the process out by eliminating the conversion from USD to GBP and by giving stablecoins some legitimacy for people skeptical of cryptocurrencies. In doing so, he hopes, the UK will become “more forward-thinking”.
Speculating on what the HMRC might do, he is most excited about a stablecoin pegged to the pound, regulated by the government saying, “It would become cheaper in the short term and all the money would stay in the country instead of paying some gas fee or whatever governmental or regulatory charge Binance might be doing.”
His excitement, however, may be tempered by the less exciting experience that Venezuela had with its national stablecoin, the Petro, and with cryptocurrencies in general. The Latin American country turned to cryptocurrencies to cope with sanctions imposed by the US on them by creating the Petro.
The Venezuelan government had tried to increase the adoption of the Petro by requiring its use for payments for some government services and fuel for airlines.
Despite these attempts, the Petro has not reached widespread adoption. Only 15% of fuel payments were made through Petro in 2020, with adoption not getting any better. Nickole, a Venezuelan NFT artist and writer at the cryptocurrency publication BitAcademyWeb, agrees. She says: “most Venezuelans do not understand what the Petro is about, and those who understand it don’t use it because it is not a decentralized crypto asset.”
Instead, most Venezuelans use other cryptocurrencies such as Bitcoin, Ethereum, and USDT, according to Nickole. “The most used coin is USDT. Many stores use it. The other most used coin is Bitcoin.”
Venezuela is not a fantastic comparison to the UK. Thanks to hyperinflation caused by sanctions and a spiraling economy, Venezuelans have turned to cryptocurrencies other than the Petro to avoid inflation, according to Nickole. “Other stablecoins such as USDT and USDC are very easy to use when making any transaction without the risk of losing value in the long term.”
Even though there are strong incentives to use cryptocurrencies, the cost, and technical requirements to use cryptocurrencies have impeded their use for many Venezuelans, especially among the poorer parts of the country.
Without such strong incentives to adopt cryptocurrencies, Moss doesn’t expect any sweeping changes. Still, he is eager to see what will happen. “It will be interesting to see what the reaction will be. Not from the NFT space or the crypto space but from outside of there.”