The government of the United Kingdom is enthusiastic about regulating stablecoins. But Scotland has had a stablecoin regime for some time. Scottish banknotes are testament to the plurality of monies in circulation. To Ousmène Mandeng upgrading the regime to serve token-based ecosystems seems a logical next step.

Stablecoins are the dominant tokenised money. Transaction volumes continue to reach record levels and, in several jurisdictions, supportive regulation is being introduced.

While concerns about stablecoins and their possible impact on financial stability remain, the instrument is not as new as people may assume. One country within the United Kingdom has one of the world’s oldest stablecoin regimes – in paper form. Scottish banknotes offer a reminder that the co-existence of stablecoins with other monies need not be controversial. Moreover, Scottish banks seem able to leverage existing regulation to move sterling “on-chain”.

The innovation with stablecoins is not the instrument. They are not new money. It is their issue form and underlying financial market infrastructure. A stablecoin is typically a pre-paid instrument denominated in a national currency issued as a digital token on blockchain and other distributed ledger technology (DLT) platforms. It enables transactions directly in blockchain-enabled ecosystems and introduces new functionality, like programmability, to address new payment use cases. 

Scottish banknote regulation

The hybrid monetary constitution of the United Kingdom has accepted cash-like instruments issued by private institutions for centuries. Under existing legislation, Scottish banknotes may be issued by three commercial banks – Bank of Scotland, Clydesdale Bank and Royal Bank of Scotland – and circulate as legal currency – though not legal tender. (Legal tender means the instrument has to be accepted in payment. Legal currency only means it is legal to issue it.) Northern Ireland has a similar regime. The notes must be reserved by “backing assets” of which 60 per cent must comprise banknotes issued by the central bank of the United Kingdom (the Bank of England), current coins and funds held in specified accounts with the Bank of England. The Bank of England banknotes held as backing assets may be kept either at an authorised location or at the Bank of England. (Non-circulating high-value bank notes, known as “Giants”, worth £1 million, and “Titans”, worth £100 million are used to guarantee the value of Scottish and Northern Irish banknotes.)

Scottish banknotes are liabilities of the issuing banks, circulate at par with Bank of England notes and take the form of bearer instruments (ownership is determined solely by physical possession). They are not in conflict with the conventional symbolism of monetary sovereignty often associated with banknotes; for example, unlike Bank of England notes, Scottish ones do not depict the monarch.

Prima facie evidence suggests that the primary statute governing Scottish banknotes – Part 6 of the Banking Act 2009 – enables issuance of Scottish banknotes as digital tokens.

The law of the United Kingdom defines a banknote as a promissory note, bill of exchange or other document. The statutory logic therefore appears institutional and economic rather than material, as the law does not appear to seek to regulate how the instrument is technologically instantiated. This aligns with broader developments in English law, where documents are routinely electronic and legal possession is increasingly understood in terms of exclusive control.

In the event of insolvency, Scottish banknotes are protected by a Note Exchange Programme (NEP). The Act does not prescribe its operational mechanics, nor does it mandate physical presentation. In principle, the NEP could administer an exchange of digital tokens for Bank of England notes without altering the statutory structure.

The tokens could be issued by the same authorised banks, represent the same legal claim, be backed by the same assets, be redeemable at par, be protected by the NEP and fall under the existing supervisory regime. Today, the perimeter for issuing Scottish stablecoins would remain closed and would not give rise to a generalised precedent.

 From paper to digital tokens

Scottish stablecoins could be deployed in different environments and be readily accepted where sterling banknotes are accepted. Stablecoins could facilitate moving sterling liquidity in cross-border transactions and function as sterling payment leg in foreign exchange. They could substitute for transactions reliant on correspondent banks and enable fund movements outside cutoff times, 24/7 and be performed on an instant basis. The new functionalities could be embedded in treasury operations, trade finance, supply chain management and other operations.

The Scottish banknotes are a tested regime that has seemingly been working well. Stablecoins would only change form but not the economic substance of a Scottish banknote. They would help maintain sterling’s reach across a wider range of financial ecosystems.

Residual objections are likely to rest on symbolism and constitutional caution rather than on doctrinal legal constraints. Digital bearer instruments introduce new operational and prudential considerations, but these are supervisory not statutory concerns. If issuance were to expand materially, financial stability implications would be reassessed in the ordinary course. The current debate about new stablecoin regulation in the United Kingdom should not, in principle, affect Scottish stablecoins. In fact, the existing regulatory framework could simply be amended to make it more inclusive. 

The United Kingdom is one of the few countries that has a stablecoin regimes in action for years. Scottish banknotes are testament to the plurality of monies in circulation. Upgrading the regime to serve token-based ecosystems seems a logical next step.

This article gives the views of the author, not the position of LSE Business Review or the London School of Economics. You are agreeing with our comment policy when you leave a comment. 

Image credit: Henning Marquardt provided by Shutterstock.