16
Examination of witness
Chris Giles
Q1 The Chair: Welcome to today’s meeting. This is the first oral evidence session as part of the committee’s inquiry into the growth and proposed regulation of stablecoins. We are very grateful to Mr Giles for attending as our first witness. The session is open to the public, is being broadcast live and will subsequently be accessible via the parliamentary website. A verbatim transcript will be taken and put on the parliamentary website.
I have to start with a formal declaration of my interests before we get going, for the record. I have investments in a number of listed financial services companies, some of which could be impacted by the development of stablecoins.
With that formality out of the way, perhaps we can move on to questions. I understand you want to go straight into questions, which is excellent. Mr Giles, stablecoins have seen most of their growth in the US but hardly exist yet in sterling form. How do you see the UK market developing and which bits of the UK’s financial services sector have the most to lose from stablecoin growth?
Chris Giles: Thank you very much, Baroness Noakes. You are absolutely right that we have not seen very much action in the UK yet. I think that is largely because we do not have either the laws underpinning stablecoins or the regulations in place yet. Equally—I think we will go on to this later—there is much less of a business case in the UK for stablecoin providers than there is in the US, but let us put that aside for the time being and think about what a stablecoin is and what part of the existing financial services industries might be affected.
A stablecoin has a number of elements. One is just a token, like a banknote or a piece of paper that has a value written on it in digital form—let us call it £1. Then you have a ledger that goes along with the token so that we know who owns this token, and that changes when ownership changes. Thirdly, you have some sort of exchange so that people can exchange real money—as it were—into and out of these tokens. Those are the elements.
If they are going to have a big impact on UK financial services, some part of that has to be better than what we have now or different or maybe taking advantage of some sort of regulatory arbitrage. If people really wanted to hold these tokens, if they saw them as a store of value or a medium of exchange, which are fundamental elements of money, and if those were better than our existing forms of money or payments—let us say that the payment system or the medium of exchange element was a lot better than currently exists—people would want to put money into these tokens, use that medium of exchange and take it out or transfer it on the other side. That is where you may see the current banking system being under some threat. We can talk about how likely that is in a second.
Deposits could flow out of the banking system into stablecoins if the payment system was much better. In very extreme circumstances—again, I think we should talk about this later—you could see that, if the store of value of UK sterling was under threat, say because the Bank of England completely failed in its duty to create monetary stability, we might see some value to people holding a dollar stablecoin in this country.
The Chair: Can I take it that you do not see much risk of disintermediation in the UK?
Chris Giles: I see some risk. We will take that in two parts. I do not see a lot of risk in the idea that a dollar stablecoin will disintermediate the UK financial system. I do not see why. If you think about the way that the UK economy works, very basically, government spending accounts for 40% of GDP—the low 40s. You pay your taxes in sterling. Why would anyone want to take exchange rate or currency risk on their salary or on their benefits by turning it into dollars, when what they spend in the shops or all the payments are in sterling? This is precisely why the UK has not turned into a euro-ised economy; the government sector wants its taxes paid in sterling. We have a very big currency right next to us, but there has been absolutely no sign or desire from anyone in the UK to move out of sterling. The only time that would be at all likely is if the UK authorities lost control of the value of sterling, so that you might want a different currency, either a euro or dollar.
If it was a UK-based, sterling-based stablecoin, the disintermediation of the financial system would come if people felt that there was something more favourable in holding a UK stablecoin than holding it in a bank account, where most money currently is. That might happen. There is a very live debate in the US about whether stablecoins are allowed to pay interest or not. If they were allowed to pay interest here, it might mean that people would prefer to hold money in stablecoins rather than in bank accounts. At present, that is not part of the regulatory proposals.
Equally, if you felt that your bank was not stable—as many people felt with Northern Rock in 2007 or other British banks in 2008—you might think that a stablecoin was a better place as a store of value, because the underpinning of money in a bank account was not secure. Those are the sorts of times when you might see some disintermediation.
If the payment systems were far better, far cheaper and far more efficient, you might again see money flowing out of the current banking system into a stablecoin world. There has to be some advantage that stablecoins are offering compared with the current financial system. In some ways, this is a good thing. You might well want some disintermediation if the system were more efficient, but you would want some competition, because we do not want existing companies to be able to make unnecessarily large profits.
That said, you could think about stablecoin as something like a narrow bank: people put money into it and it is then backed by short-term government liabilities or something incredibly safe; that would be like a narrow bank. You would not necessarily, almost certainly, want to introduce a system of narrow banking in which you might find that the banking system does not have some of the means to finance mortgages and loans to companies through the back door. Parliament would want to think hard about turning our financial system into a narrow banking system through the back door, if that is a possibility. Again, none of these things are likely, but they are the sorts of things you want to think about when making regulations.
Q2 Lord Smith of Kelvin: Mr Giles, I have read a lot about the risk that stablecoins could bring to the UK financial system. I am very interested in what opportunities you see for stablecoins. It has not really taken off here yet, so what are the opportunities?
Chris Giles: The reason it has not taken off in pretty much any form is because there is not a clear legal underpinning or clear regulation. You would be taking quite a risk to be putting money into a UK stablecoin. But let us assume that the authorities are working on all of that, and that we have a regulatory system that makes it stable and safe to put money into a stablecoin; the principal opportunity would be in making transactions and payments more efficient, cheaper and potentially faster than currently. This is particularly where people see opportunities in the US, where the current payment system is, frankly, antiquated compared with European payment systems domestically.
If you think about ordinary people here, they can transfer money from one bank account to another bank account immediately for no specific charge, so it is quite hard to compete with that. Of course, there are hidden charges in the way that the banks operate—they bundle a lot of services together—but it is quite hard for a stablecoin to compete with that sort of efficiency. Equally, we have regulations that put caps on domestic credit card and debit card payments at 0.2% interchange fees. They are about 2% in the US, so there is a massive difference. It is massively less attractive in the US and much harder for it to compete against card payments in the UK and Europe.
But you might think there is more of an opportunity in cross-border payments. If you have money that is held on a sterling stablecoin, at some point, it would move into another currency—a dollar or anything else, almost certainly at present through the dollar. The dollar would almost be central if it went into Japanese yen or a much smaller currency. Currently cross-border payments are slow, cumbersome, difficult and expensive. If there is an opportunity through this technology to make them faster, while maintaining all the regulatory safeguards that we currently have—they actually make cross-border payments slow, cumbersome, difficult and expensive—and if we can do that much more efficiently and cheaply using this technology, that is an advantage for everyone.
Also you might see very large corporate payments moving to a different technology because, unlike day-to-day retail payments, their charges are higher and you can see some advantage that a new technology might bring.
Q3 Baroness Donaghy: Good morning. I want to ask about the scale that we could ever get to if we maximised the opportunities of this and whether a cautious approach to investment might save us from the worst excesses that could happen in the United States. I am not saying that they will, but they could happen. Do you think those two things combined—that the opportunities of scale are fairly small and our cautious approach to investment—means that this is really not going to be a runner in this country?
Chris Giles: Certainly people in the industry think that it is potentially a runner and they are putting real money behind that, so I would be very cautious about saying that it could not be a runner. But let us talk about scale. For example, notes and coins in the UK, if my memory serves me correctly, are roughly—a round number at the moment—£100 billion. You could see why a stablecoin is an attractive business for a private provider, just like private banking in the 18th and 19th centuries was a very attractive business. If people were willing to put £1 billion in your stablecoin and you could invest it in something incredibly safe, such as short-term government bond markets, which currently pay 3.75%—close to the Bank of England’s interest rate—that is £37.5 million profit for doing nothing, basically.
Just as governments know from seigniorage revenues, with £100 billion in notes and coins not paying any interest on them, the UK Government make about £3 billion to £4 billion a year or do not have to spend that on interest. It is potentially a profitable business and that is why you will have some people who might be very keen to do that.
I think a reasonably cautious approach is warranted, because you absolutely do not want a stablecoin business emerging that is basically based around some form of regulatory arbitrage, where we set up a system that is sort of creating money or that has a new payment system with money, but which we do not regulate like current money. That might mean that our current regulation of money is wrong and that we should all move, but everything should be on a level playing field. What we absolutely do not want is for some sort of regulatory system that allows a new technology to come in, not because it is better, cheaper or more efficient, but because it can get around regulations. I think you want to be particularly careful about that. The risk of that, which I am sure we will come on to, is relatively large.
Baroness Donaghy: Do you think that some of the interest from the industry that you referred to could be more of a defensive action—a fear that the traditional money supply is under attack with these alternative forms and that they are just ready to be on the defensive against them by providing different products that are maybe not so risky?
Chris Giles: At the moment, we are at a good stage for thinking about regulation. It has been around long enough or been talked about long enough for it not to be completely blue sky, yet it is still early enough that not much is happening in the payment space with stablecoins quite yet. They are currently used, particularly in the US, for going in and out of cryptocurrency, which is an intrinsically worthless asset but it has value. People exchange it because they see a scarcity value in it, but they want an easy way to go in and out of bitcoin, let us say, and they move in and out with stablecoin. You can see some fantastically large numbers of transactions, but they are all basically the same thing. The vast majority of these are just going on and off ramps into crypto.
As far as that is concerned, it is not massively interesting and it is not going to take over the world or be something that needs a lot of regulation because it is a bit of a Wild West in the crypto land. If people want to day trade—the numbers are very large—that is up to them, but they are taking some very big risks, as anyone holding bitcoin over the past week will know.
It is much more important if it becomes something that the regular public were using day to day for payments, companies were using for payments or was very big in the cross-border space. That is where we need to be much more careful.
Q4 Lord Vaux of Harrowden: First, I need to state that I have an interest, in that I own shares in Fidelity National Information Services Inc, otherwise known as FIS Global, which has a range of payment businesses and is also my ex-employer.
You talked a little bit about regulation there, so would you like to tell us about your thoughts on what the Bank of England and the FCA are proposing in regulation? Are they in the right place or are there some major issues there?
Chris Giles: I am absolutely not in any way an expert on the FCA and the conduct side of this, so I will leave that aside, if that is okay. On where the Bank of England’s consultation is, there was a very interesting shift in position from the Bank of England in October last year. The Governor, Andrew Bailey, went from being relatively—if he were characterising his position, he would probably put it in different terms—hostile to stablecoins in their entirety to saying, “Let us take the two words, stable and coin. If they are both stable and coin as in money, we will treat them like money and regulate them like money”.
So they have to have backing and that is incredibly important. You could have a stablecoin where someone just asserted that it was worth £1 and had nothing behind it at all. That would be fine as long as everyone believed it was worth £1, until the day it was not. If they stopped believing it was worth £1, it would go from being worth £1 to being worth nothing. The backing is incredibly important. In the US, the GENIUS Act this year insisted on backing in short-term Treasury bill markets. Here in the UK, the current proposal is for the backing to be one for one, and 40% of that has to be in just unremunerated money, so is very liquid. If there was a run on this stablecoin, you could just turn it straight back into money and 60% in short-term government bills, which are incredibly safe.
That seems reasonable, but that 60:40 split is entirely open for negotiation and finding our way on what is the right level. The Bank of England’s reasoning for the 60:40 split is that, it says, these stablecoins, if they are just like money, like a £1 note, are not there—unlike the banking system—to transmit monetary policy to the rest of the economy, so we have to keep them basically in their box: 40% as just money so that it can make a profit and they are viable, and 60% that can be backed by something that is interest bearing. The industry clearly wants much more on interest-bearing deposits.
This is a risk judgment. It is essentially about how much of a chance there is that there would be a very big run on a stablecoins, such that you had to liquidate the money incredibly quickly, even with something very liquid like government bills, which would create a ripple through the banking system. I am not an expert on what that balance is, but that is a choice. That is why that backing is very important.
The other thing that is incredibly sensible in the Bank of England’s approach is that it is insisting that there is ultimately a backstop, just like the Bank of England is a backstop for banks, so that if there was a very rapid run, ultimately the Bank of England could step in to provide liquidity assistance. Again, that is very important. Also, all parts of the stablecoin infrastructure and ecosystem—so the coins themselves and the exchanges where you put money on and off them—need some sort of regulatory oversight and backing, essentially an insurance mechanism, so that if there were normal business risks, cybersecurity incidents or these companies went down, they would be resolvable so people did not lose their money.
This is exactly the same as what happens in our banking system. We have the FSCS to underpin deposits. While it has limits, the truth is that we know in this country, just as in America, that if there was a run on a bank and those limits were busted, the Government would step in. That is unwritten but it is known. It happened in 2023 with Silicon Valley Bank, because you do not let depositors lose money, whether they are individual customers or companies. These stablecoins will need that same underpinning. Whether or not it is entirely written down, frankly, that would have to be there.
The Bank of England is also insisting, which I think is also a good idea, on pretty strict rules of interoperability. If this is money—in essence, it is money and is being used as money—you do not want it to be an Amazon money that you cannot take out of the Amazon ecosystem. It would get stuck and have very large fees to take it out, and it is not properly interoperable with other forms of money. It needs those sorts of rules. It comes down to the singleness of money: £1 is £1 wherever it is held and whoever is issuing it. If it is a NatWest £1, a Lloyds £1 or an Amazon £1, it ultimately needs to be £1. That means the Bank of England has to be the backstop behind it, because the Bank of England is the only entity that is authorised to create base money in our economy.
Lord Vaux of Harrowden: What about the one that everyone gets very excited about, or the industry gets very excited about, which is the ability of the stablecoin to pay interest?
Chris Giles: Again, that is a particularly live point in the US at the moment. There is a disagreement between banks, which fear that their non-interest-bearing current accounts might be disintermediated by the stablecoin business. What they are trying to do is the important principle here. A stablecoin could ultimately just be like a narrow bank, where you deposit money in it and it is ultimately backed by government-bearing securities and does not do any lending, so it is very safe and secure. If those paid interest, you get into the whole issue that, if that disintermediated the banking system, which is our financial system, you would want to be very sure that it did not do it to an extent that meant that you could not have mortgage lending or corporate lending, because we had not arranged a system of mutual funds to do that longer-term lending on an equity basis.
That is again where you want to get your regulation right, but there is nothing inherently wrong with a financial system that is based on narrow banks and then a different form of lending in the long term. Again, if it is really about payments, there is no need to pay interest. If it is about changing our whole financial system into a narrow banking system, we will want to do with regulation and think about it that way—not think about the technology first, but about what we want the outcomes to be for society and for our financial system.
Baroness Donaghy: I forgot to declare that I have no financial interests, apart from the fact that I would quite like my bank account to remain safe.
The Chair: I think we all share that one. Lord Griffiths.
Q5 Lord Griffiths of Fforestfach: Mr Giles, you made quite a convincing case that the incentives to move in the direction of sterling stablecoins are very weak in the UK. As one looks back some decades, one sometimes feels that the Bank of England was there to protect the City. You think, for example, of the discount houses—there could have been a lot more reform of them—or when we had competition in credit control in 1971. You felt the Bank was pressed into doing it more than wanting to do it.
Given that we are discussing this issue now, and that we have not gone as far as America yet, do people at the very entrepreneurial end in the private sector see some developments that we may not be seeing but that you have access to, which makes a case for introducing sterling stablecoins?
Chris Giles: I certainly agree with you that the case for trying to ban or not allow them is very weak. As long as they are appropriately regulated, so that they do not take off because of regulatory arbitrage just by having some sort of easier regulation, particularly in areas that we care a lot about—like money laundering, banks knowing their customers and financial crime—there is potential for some opportunities, we hope.
It is country true that for cross-border payments for people in the UK, companies in particular, and people who have large cross-border payments quite regularly, the current system is clearly not a good system. It is slow, inefficient and costly. That is a part of the payment system and for the UK it the most important part of the payment system. Clearly there is a case for better technology improving the way that it works.
That can perhaps be done through stablecoins, but there are other routes and other entrepreneurs, either people in the private sector or in the public sector, are looking at that. In Basel, the Bank for International Settlements—the central bankers’ bank—is trying to push Project Agorá. In essence, that is a way of bringing the correspondent banking system into the modern world by having it tokenised and programmable, so that you stop all these delays, particularly where money gets stuck half way through a transfer because some part of some bank in the chain has not done its anti-money laundering checks and is taking a lot of time. This can be incredibly frustrating.
As long as systems are in place to ensure that we prevent crime and other things that we do not want to happen in the payment system occurring, let a thousand flowers bloom. This is exactly where we want the regulations to allow people to come up with new ideas and new ways of allowing people to transfer money, because there are clear inefficiencies in our current system. In the UK, it is concentrated much more in cross-border payments. In the US, it is taking off much more because its existing payment system is so much worse and more expensive than the European payment system. There is definitively real arbitrage that is nothing to do with crime or with getting around regulations, but is just to improve the payment system there.
Lord Griffiths of Fforestfach: Can I ask you one other question? The Bank of England has said on a number of occasions that—I am not sure it has said it directly in this debate but you feel it is behind that debate—if we move to a more competitive system in the transfer of money, it would somehow, in the very short term, lose control of the ability to conduct monetary policy because it would lose control of the short-term interest rates. How much weight do you feel there is in that argument?
Chris Giles: I do not think there is a huge amount of weight in it. If the UK banking system was entirely disintermediated, yes, that would be the case and then it would be difficult to set a short-term interest rate because that is done through our banking system, which spreads that interest rate through the rest of the economy. But as I said, I do not see the immediate risks for everyone suddenly holding all their money in stablecoins rather than in traditional banks. We have digital payment systems already. For the vast majority of people, you just go to the shop, tap your card or tap your phone; all these things currently exist. For a stablecoin to be better and to start to disintermediate that, it has to offer things that the current banking system does not. It is not entirely clear that that will happen when we have pretty efficient payment systems already for domestic transactions, particularly retail transactions.
I do not see it as a huge problem. It is much more likely that you might see some large corporate payments, but again our payment system is pretty advanced and the Bank of England is constantly updating its real-time gross settlement systems, so those are essentially moving along with the digital transformation. I have not seen anyone give me a very convincing case yet that a stablecoin regime—when you have to put money through some sort of exchange on to a coin, have the coin then make the payment with a distributed ledger, which is not necessarily massively fast, although that already does seem to improving quickly, then go down the other side and meet all the know your customer and anti-money laundering rules—would be so much quicker that it would entirely destroy our banking system. I agree that would be a bad thing. It is something we should think about and weigh off the costs and benefits of doing so.
Lord Vaux of Harrowden: On the customer point of view, yes, our current system is free from the consumers’ point of view, but it is not free from the retailers’ point of view. Is this something that can be driven from the sellers’ or retailers’ side?
Chris Giles: Absolutely, but again I think the merchant fees are roughly 0.6% in the UK and 2% and a bit in the US, so the opportunity for arbitrage is smaller here. If you think about what would have to happen, the merchants would have to offer lower prices to people who paid through a different technology—because currently for the consumer it is free and instant—or have some advantage, that you only pay when you receive the goods, when it gets delivered, and you do not pay in advance. There are definitely things you can do with programmable forms of digital money that you cannot currently do. Again, I do not see any reason why you would want to stop people trying to offer something better to consumers and merchants. You absolutely do not want to sit there, as a regulator, basically stopping it through very strict regulations.
The question is: if it is money, it needs to be regulated like money. We need to allow the regulation to be sufficiently permissive such that entrepreneurs can come along and try to offer better services, and to be sufficiently restrictive that is not done just because they are getting around some annoying piece of regulation at the moment. If it is just an annoying and useless piece of regulation, we should not have it in the first place.
Q6 Lord Davies of Brixton: Before I get on to my substantive question, I just want to clarify my thinking of what you have said so far. I cannot see anything in what you have described that stablecoin can do, as a retail customer, that I cannot do with my Revolut account.
Chris Giles: Yes—there is very little.
Lord Davies of Brixton: From this side of the curtain, I see no difference.
Chris Giles: That will be the great difficulty in stablecoins becoming attractive to the public.
Lord Davies of Brixton: You also mentioned the functions of money—a medium of exchange and store of value—but the third function is that it is a unit of account. I cannot see how stablecoins are a unit of account. In which case, it is not really money; it is just a different form of banking.
Chris Giles: It is a unit of account if people are absolutely sure that it is worth the £1, if the backing is so secure. Again, it goes back to how, ultimately, £1 in your bank account is a unit of account, because we know that, if I transfer money between Abbey National and NatWest, and it is the only transaction that happens through the day, it will go via the Bank of England. That is why we know that £1 is £1. It is not an Abbey National £1 or a NatWest £1; that is the unit of account. If you have sufficient regulations that a stablecoin must have ultimate backing by the Bank of England, it can act as a unit of account in that way.
Lord Davies of Brixton: But that would be true of any bank account.
Chris Giles: Yes.
Lord Davies of Brixton: But the ultimate unit of account is the fiat currency from the Bank of England.
Chris Giles: Yes.
Lord Davies of Brixton: You have talked about the primary function of stablecoins being getting in and out of crypto. Put that to one side: are they just to facilitate illicit transactions?
Chris Giles: At the moment there is that concern. Putting aside just moving from the on and off-ramp to crypto, in real life that is what it is used for quite regularly, just like cash is. Let us not pretend that there are no other ways for people to launder money using regulated entities from government. Suitcases of cash have been used for centuries for illicit transactions. Stablecoins clearly have many of the advantages for crime that cash does, in terms of anonymity. What you need to find is some means of turning your stablecoin—since you cannot go down to Sainsbury’s and buy lunch with a stablecoin at the moment—back into fiat money. That is generally possible or has been possible—this is where international regulation is important—on distributed exchanges, which may not be located in areas of very effective financial regulation.
The New York Times had a very good example in December of how you could have criminal activity with stablecoin. It took a $20 bill to a cashpoint, loaded it up into a stablecoin and then in—I think it was—a Kyrgyzstan distributed exchange. It got turned into dollars on a payment card run by either Mastercard or Visa, one of the big payment providers, which then could be spent anywhere in the US. That was a legal $20 bill, so there was nothing illegal in that transaction at all, but it could have been illicit money. There were no know your customer checks and no anti-money laundering checks. That is the concern with stablecoins: that somewhere in the process these checks are not happening and that is how you get illicit transactions. That is why it is attractive to criminals.
The Chair: Is there any evidence of the scale of illicit activity?
Chris Giles: Chainalysis has an estimate that 84% of illicit international transactions go through stablecoins. Anyway, they are the people to talk to. Obviously any estimate like that is difficult, because people do not go around answering surveys if they are criminals, so I would not put too much weight on it. But there is a fear from reputable people that stablecoins are your new suitcases of cash.
Q7 Lord Lilley: You may already have hinted at the answer to my first question, summarised by Lord Griffiths in the preamble to his question about the lack of incentives for these things. What is the essential difference between stablecoins and electric bikes and scooters? I mean that in the sense that, prior to the introduction of a regulatory system for electric bikes and scooters—and indeed for stablecoins—people said that there ought to be one, but the lack of a regulatory system did not stop people investing heavily in creating networks of electric bikes. Why is the lack of a regulatory system stopping people going ahead and producing stablecoins now? Why does TransferWise—which I use to transfer money to France, where I have a house—not provide me with a bitcoin and further reduce my costs?
Chris Giles: I think the reason why it does not is because the providers would like a regulatory system so they can assure their customers that this money is safe. They would need some way of ensuring that you were absolutely 100% sure that they were not taking your money, putting it on Lucky Boy in the 2.30 at Cheltenham, with the ability—maybe or maybe not, depending on how the horse ran—to pay you back at the end of the day. Regulation can provide that security if people trust the regulation and it is done properly. Otherwise they need some other form of security and trust that you will be willing to use their services. That could be just that lots of people have used the services and they have a very high score, so that you ultimately feel that you trust it.
I caution against going down an entirely regulation-free system because I think it will not grow very fast. You might trust it, but lots of people would not, and people would want backstops to know that there is something in place, in case there was a run or a cyberattack on TransferWise, which had offered you a coin but might not be able to pay it. One of the things that we know people value a lot with money is some security with their payment system, with some backstops there in case something goes wrong.
Lord Lilley: I am not advocating a total lack of control. I am just puzzled as to why people have not moved ahead and done it. I am not quite sure why I trust TransferWise, but I do. It gave me a card as well, which I stuck some money on. I am sure I would trust it if they provided me with a stablecoin and said that the fee was coming down by another two-thirds relative to the banks. Anyway, that is question 1.
This is question 2. We allow the banking system to operate even though it is fundamentally fraudulent, in the sense that we give them £100 and it pretends to have kept that £100 for us and will give it back. Actually, it has put some of it—not on the 2.30 at Brighton—into longer-term illiquid investments. We do that because we want short-term savings to be converted into long-term investments. Why should we not allow a system of stablecoins where a fraction, like deposits, will be used for long-term investments and the system supported in the same way as the banking system by the central bank operating as a lender of last resort?
Chris Giles: You have created a bank, have you not? That is fine. We do allow them: they are just banks.
Lord Lilley: What about the blockchain element of it?
Chris Giles: I see no reason why we should ban or try to prevent people using superior technology, if it is superior technology—absolutely none. No, we want to encourage that.
Lord Lilley: I seem to remember that we received some briefing—I suppose it was a private briefing, so I had better not say where from, but it was a reputable source in the monetary system—that said that it was thinking of allowing stablecoins as long as they were not operated by banks.
Chris Giles: I have not seen that. The key thing is that, if it is money, it is regulated like money. You want to get that regulation right, regardless of the technology and make sure that you have sufficient backstops in your payments technology such that, if there is a cyberattack or some other business risk, everyone knows what would happen and how to get redress. Apart from that, as I was saying, the opportunity is that this is a better technology, but they have to prove that it is a better technology.
Lord Lilley: In essence, they would have to prove to users at one end or the other that they will get some benefit.
Chris Giles: Yes.
Q8 Lord Hollick: My register of interests includes some financial services companies which, as far as I know, are not involved with stablecoins.
I have two questions. Coming back to the cost, you have made the point effectively that the cost of transferring money in the United States is much greater than it is in the UK. There is tremendous benefit if you can do it and reduce the cost. There are also quite high costs in the UK, if you are using credit cards and things like that. What scope is there to introduce the blockchain technology that lies behind crypto coins to reduce the cost of transfer of money in the UK to the benefit of the economy?
Chris Giles: You can have much lower costs of transfer because the technology of a distributed ledger is inherently superior to a centralised ledger. In essence, that is the difference. I am absolutely not an expert, so you will need to talk to people in the industry about whether that is sufficiently superior as a technology such that you can lower the cost. If you can lower the cost and maintain the security, regulation should do nothing at all to stop people doing that.
Lord Hollick: It seems to me that the description you gave of money transfer here required an on-and-off ramp from sterling into stablecoins. The cost of doing that is not negligible. To the extent that technology would help that to be reduced, it should be encouraged. To the extent that no interest is paid on stablecoins, there is no incentive to retain money on it other than if using it as a daily transfer. I gather that this debate in the United States is, from a political point of view, quite well and heavily contested, not least in funding candidates for the mid-term election. A political battle is going on. Stablecoins being able to pay interest would make it an attractive home for some of your funding. It seems to me that that battle will be joined over here in the UK. What are the arguments against providing interest on UK stablecoins?
Chris Giles: Ultimately, it comes down to what stablecoins are trying to do. Of course, currently, you can have an instant-access bank account that is interest bearing, whether you are a company or an individual. It is not that those accounts do not exist. We have quite a lot of money in them. I cannot, off the top of my head, remember exactly the value of sterling notes and coins in non-interest-bearing accounts. That is part of it, but we also have sight deposits in interest-paying accounts.
A stablecoin would be competing with the latter, if it was allowed to pay interest. Clearly, that interest rate would almost certainly be lower than the Bank of England’s interest rate. It would be short term. If you could take your money in and out instantly, it would be lower than that because the stablecoin providers have costs that they would have to meet, like banks do. But I do not fundamentally see why you would not want to do it.
The Bank of England says that this is a payments technology, not a form of banking, and so they should not be allowed to pay interest. However, because we already have accounts that pay—some of the large US banking groups are offering pretty good rates of interest on instant-access deposit accounts—I am much less convinced that it would disintermediate the banking system, because these other accounts have not done so, and that it would take over the whole of our financial system.
Lord Hollick: From a competitive point of view, if it were between the London market and the New York market, do you think we can be relatively relaxed by not opening the doors that the GENIUS Act has done in the States and not having a free-for-all? Will it still be able to thrive as a rather more heavily regulated system than in the US, which is now looking to operate on a 24-hour basis and provide 24-hour liquidity?
Chris Giles: Of course, if you are retail customers here, you can have 24-hour payment services instantaneously already. At no stage should the authorities in any way try to stop advances in technology that make the payment system cheaper, efficient and faster. It is an absolute principle that we should not necessarily just try to protect our banking system; we need an eye on whether the technology is so much better that it would disintermediate our current financial system. Then we would probably want to go there because we want to take the efficiency gains, but should go there with open eyes and an ability to ensure that we knew the consequences.
If you are saying, “Let us have a narrow banking system where all banks do is take in deposits and then invest in entirely safe securities”, and we want that to be fundamentally how people hold money—it might be interest-bearing or not, or there might be a small amount of interest paid on those accounts; then we want to fund investment and households’ and companies’ ability to invest and borrow money through some different form that is not a traditional banking system but, let us say, some equity mutual funds, where people would put money into some ETF or some mutual fund that would then offer mortgages to people; that would be a perfectly reasonable financial system. However, you would not want to go there or think about that just because of an advance in technology, because the interim might be quite uncomfortable.
Lord Griffiths of Fforestfach: As people say that you should not pay interest on the assets that back stablecoins, to what extent are the monetary authorities objecting to privatising the seigniorage?
Chris Giles: We need to think about whether prioritising seigniorage is valid for the authorities to do. It is not huge. Notes and coins that have zero remuneration on them save the Government £3 billion to £4 billion at the moment—or roughly that order of magnitude. With GDP at £3,000 billion a year, it is 0.1% of GDP, which is not a lot of money. It will not fundamentally change our public finances.
However, the history of private banks is not a happy one. Everyone knows why private banks are attractive businesses. If you can take seigniorage yourself rather than the authorities taking it, it is very profitable and you do not have to do much. Even if you paid a little bit of interest, there are still potentially profits there. In the past, in the end we have had to regulate private banks carefully such that they can meet their commitments to pay the money back. That regulation is on their business, so that they are not taking business risks such that they cannot pay the money back. It is on their liquidity, so that there are no run risks. They are all the same risks that we have with the banking system and come with a private bank.
If you have a very competitive private banking system, as we had in the 17th century here and the US had in the 19th century, it would not be very happy, because in the end your JP Morgan dollar would not transfer to your other dollar, as there was no singleness of money. That is an important principle because you do not want to have a suggestion in the economy that £1 with one label is not the same as £1 with a different label.
Q9 Lord Sharkey: I do not have an interest to declare but I do have a question. What is the position of Visa and Mastercard in all this? Do they see stablecoins as a significant threat to their business?
Chris Giles: To be honest, I do not know and you will need to ask them.
Q10 Lord Turnbull: I am looking at this from the point of view of the authorities of two kinds—the law enforcement authorities and the tax authorities. Are they worried about this? What do the authorities know or have a right to ask for and be told about who has what holdings? Are we entering a world where inheritance tax planning means getting as much of the assets as you can into these stablecoins before you die and give them to your heirs, as the authorities do not know what is happening?
Chris Giles: In that example, the authorities should have as much information and right to information as they currently have. I do not see a difference between an asset held in a bitcoin or in a stablecoin, or in a suitcase of cash or an artwork hanging on the wall—all of which the authorities have powers to investigate. They should be identical.
Lord Turnbull: In reality, will they find it easy if these accounts are largely anonymous? Does it make it easier for people to disguise the assets that they are holding?
Chris Giles: It might do in the same way that a suitcase of cash held under the bed does. That is anonymous. It would have to be taken out of the regular financial system where the records are. That transfer is presumably traceable initially, when you take your money through the exchange to put it on to a stablecoin or a crypto. When things move to the UK regulatory shore, the regulatory boundary, they have to be policed pretty carefully. It is just like how we police someone wanting to take £100,000 out of a bank and put it into a suitcase of cash. That is policed. That is not a friction-free transaction that anyone can do regularly.
Lord Turnbull: Another way of looking at what you are saying is that the leakages created by cash are being multiplied by another way of moving money around that is difficult to keep track of.
Chris Giles: Yes. That is where you want to make sure that you have a system—and certainly our tax authorities want to make sure they had a system—to be able to monitor when it moves from the UK regulated sphere into something that is unregulated by the UK authorities. You need to have visibility about that transfer.
Lord Turnbull: Would they be able to demand that information from the bitcoin providers?
Chris Giles: From the exchanges? I do not know, but it would be sensible. They should require that they can do an investigation at those points, with all the normal due process attached.
Q11 The Chair: Mr Giles, I have one last question. What areas do you think we should concentrate on as we move into our inquiry?
Chris Giles: The questions I have faced today are exactly the areas, but it is always hard to find the precise advantages. We can say in vague terms and I have, in vague terms, said that, if it is faster, more efficient and cheaper, it is an advantage. We need to pin down how much that is. Is the distributed ledger technology that much better? Do we want to spend a lot of time putting in regulations for this or is it a load of hype? That is an important question on the benefit side of the ledger.
Then on the cost side, all the questions that the committee has asked are entirely in the right place. How risky is this? Some of the things the Bank of England proposed in the consultation document address quite a lot of these risks, such as the backing. Is the 60:40 split right? The Bank of England is in entirely the right place in saying that £1 in one stablecoin has to be equal to £1 in another stablecoin. This is not a way of privatising money and privatising sterling. Have we understood all the risks so that we, as a society, can make a genuine cost-benefit calculation and trade-off here in a world that is uncertain?
We need to do this in a way that creates a regulatory environment that is relatively stable for a long time without banning or saying no. We absolutely do not want to prevent entrepreneurialism and improving our financial system, but we need to be aware of all the risks that might come with that.
The Chair: Excellent. I would like to thank you very much on behalf of the committee for answering all our questions. It was a terrific session. We will have a short pause before we move on to our next one.
