16
Examination of witnesses
Lucy Rigby, Laura Mountford and William Morello.
Q167 The Chair: Welcome to today’s meeting, which is the 15th oral evidence session as part of the committee’s inquiry into the growth and regulation of stablecoins. Thank you to the Economic Secretary to the Treasury, Ms Rigby, for attending. The session is open to the public and broadcast live, and will be subsequently accessible via the parliamentary website. A verbatim transcript will be taken of the evidence and will be put on the parliamentary website.
Economic Secretary, I would like to congratulate you on surviving to your second appearance in front of this committee. Most Economic Secretaries do not manage to make a second appearance; they disappear after the first, so this is very good news to see you again. I understand, Minister, that you wish to make an opening statement.
Lucy Rigby: I would, Chair. Thank you very much. It is very nice to be before the committee again. I should say that the directly prior Economic Secretary was promoted, so she had very good reason for moving on. Nevertheless, it is good to be here again and I am grateful for the opportunity to make a few opening remarks.
I thought I would say a few words about the Government’s current view of stablecoins and why they matter to our wider ambition for the financial services sector. That ambition, as I know the committee will be well aware, is for our financial services sector to continue to be the success story that it is, to the benefit of our wider economy and the country as a whole. Pursuant to that ambition and to ensure that we maintain our position as a world-leading financial services hub, we have to be able to harness the opportunities presented by digital assets. Stablecoins specifically can play an important role in unlocking the full potential for blockchain technologies, because they interact with digital assets directly.
Digital assets, as the Government have been clear, are very much, in our view, here to stay. As they become more intertwined with traditional financial services, it is paramount that we get our approach to regulating them right, and that is particularly true for stablecoins. The Government’s approach to that regulation is one that intends to strike the right balance. We want an environment where firms innovate and invest here in the UK, and do so with confidence, where also consumers are appropriately protected against detriment and risks are managed appropriately and proportionately.
We recognise that today stablecoins are primarily used for settlement in crypto asset trading, but, with the right regulation, we consider that they have the potential to be used for retail payments. This could deliver real benefits to consumers and businesses, notably from cheaper and faster cross-border payments, which, as the committee no doubt has explored already, could well have knock-on economic impacts.
We should also be, in my view, clear eyed about the risks. If adoption becomes sufficiently widespread, absent the right regulation—and it is important to stress that—they could pose risks, including to our financial stability. That is exactly why our regulatory framework here in the UK has to be sufficiently robust. As the committee is well aware, the UK market for stablecoins at the moment is nascent. It is important that regulation fits the situation as it is today and is then sufficiently nimble to develop and evolve.
Via our new crypto assets regime, we have established a new financial services regulatory framework for crypto assets, including a new regulated activity for the issuance of stablecoin. This is about providing those regulatory foundations for stablecoin here in the UK. There is plenty more work under way, as I am happy to talk about, in the Treasury at the moment, particularly when it comes to the retail payments landscape and the potential for stablecoins to be brought into regulated payment chains.
As we finalise that approach to regulating stablecoins, I come back to the importance of the fact that the UK has a regime that protects consumers, backs innovation, manages risks and, importantly, keeps the UK at the forefront of global financial services innovation.
The Chair: Thank you, Minister, for giving that insight into the Treasury’s view on the role of stablecoins. That is very helpful. Do you think that the UK has acted sufficiently speedily on this? We have had comments that we are behind the pace. We are certainly behind where the US has got to and behind the EU. Have we have injected sufficient pace into the implementation of the regime that is necessary to surround their implementation?
Lucy Rigby: I would reject that characterisation, as you might expect me to do. In doing so, I do not wish to underplay the importance of moving quickly and nimbly, as I said earlier, in relation to digital assets as a whole and ensuring that the UK, for the reasons that I just outlined, continues to be a leading jurisdiction when it comes to financial services as a whole.
Our regime that we recently were discussing in Parliament is one that will ensure that we are internationally competitive in this area. It comes into force in October 2027, but, as no doubt my colleagues from the Financial Conduct Authority will cover in more detail later on today, the authorisation gateway will open a good deal in advance of the regime coming into force in October 2027. There is plenty of interaction and discussion between the FCA and firms in ensuring that firms can be as ready as possible with their applications, so as to be able to apply, be successful and then get going when the regime comes into force.
If I might, Chair, I would make the suggestion that, as you just put it to me, very often we are being compared with the United States in this area, but both the US and the UK are not expected to publish their full regulatory regimes until mid-2026. While it is important in many ways to be looking internationally at where we are, for very good reason, we compare well.
The Chair: Can you tell me what analysis the Treasury has done on the impact of stablecoins if they become a significant part of the UK financial landscape? What impact would that have on government debt? This is in particular because of the requirement for backing assets to be high-quality liquid assets in the case of non-systemic stablecoins and to be significantly in holdings of gilts for systemic stablecoins. Is this a positive issue for the Treasury or one that carries risk?
Lucy Rigby: I come back to the fact that the market for stablecoin in the UK at the moment is nascent. That being said, I hope, Chair, that you will find it reassuring to know that there is, and indeed has been, a good deal of thinking going on at the Treasury, and I know at the FCA and the Bank as well, about the potential impact of stablecoin on government debt.
In theory, the more the stablecoin market grows, the more the demand for government debt increases. As the Treasury, we want a well-diversified investor base to enhance the resilience of our financial programme more broadly. There has been a recent consultation on the UK Treasury bill—T-bill—market. One reason underpinning that is the potential growth of stablecoin.
The Chair: The Government have no particular concerns about the implications of the growth of stablecoin on the financing of government debt.
Lucy Rigby: I think that you are encouraging me to go to issues of financial stability, and of course there could well be impacts there. It is critical that not only the Treasury but also the FCA and the Bank in particular get regulation in that area right. I was recognising that we recognise the interlinkages between stablecoin and demand for government debt, particularly in short-term government debt. That is behind our T-bill consultation.
Lord Griffiths of Fforestfach: Can I ask one question to follow up on that? If there is an increased demand for government debt, it would be for short-term government debt. If you look at the difference at present on, say, gilts compared to other countries, we have a significant difference. Seeing that the increased demand for government debt would be subject to a payments mechanism that was in and out, to what extent would that potentially lead to greater instability in the debt market and maybe increase the margin we have to pay for our debt over what comparable countries, so middle-sized European countries, would be paying?
Lucy Rigby: When it comes to financial stability, in extreme scenarios there could be solvency risks that stem from the very substantial growth of stablecoin and impact on government debt. I come back to the importance of getting the regulation in these areas right. You will know that the Bank was recently consulting on the right regime for systemic stablecoin, which is the circumstance in which the situation being referred to is most likely to come about.
Q168 Lord Smith of Kelvin: Good morning. In 2022, the Government said they would legislate to bring stablecoin within the payments regulatory perimeter, but then they reversed that decision. However, in your written evidence HM Treasury states that it now intends to bring stablecoin into the UK regulatory perimeter for payments. Can you explain why the Government have changed their view?
Lucy Rigby: You are absolutely right. The starting point is that we are looking to bring stablecoins into regulated payment chains. Our reason for doing that is that we think there could well be benefits for consumers and businesses in ensuring that stablecoins can play a part in that particular landscape. As the committee will be well aware, there are tremendous benefits of having a diversified and robust payments landscape, with all the usual benefits that stem from competition and consumer choice, notably, in theory, lower costs of transactions and then an impact on our wider economy.
I might let my officials come in on matters that predated this Government’s tenure. I suspect that they may well take the view that there has been a degree of consistency in the intention to bring stablecoins into payments.
William Morello: In 2024, the Government said that they were going to proceed with the crypto asset regime in line with the proposals that had been published by the Treasury previously, but that they thought stablecoin payments were best done as part of broader reforms, which had been in the pipeline for a while, to the UK payment architecture. That is what the Government are looking at now. By doing that, we can ensure that, in this new world of tokenised payments, we can have a payments framework that facilitates both traditional payments and tokenised payments in a coherent and comprehensive way.
The Chair: Is this a comprehensive inclusion of stablecoins within the payments regulations? Your written evidence says that the Government have further plans to bring certain stablecoins in. Which stablecoins?
William Morello: When it comes to payments, the most important thing is that a stablecoin is truly stable. As part of the crypto asset regime, we are introducing a new regulated activity for stablecoin that is issued in the UK. That will mean that the FCA is able to place all of the necessary rules around backing asset coverage, ensuring that you have high-quality backing assets and all the rest of it, so we can have that confidence that a stablecoin is meeting all of the necessary standards in the UK to be able to be used in payments.
The Chair: All stablecoins that are regulated will be within the payments regulations?
Laura Mountford: This is an area that the Treasury has confirmed it will be consulting on, so there are still matters under consideration for consultation, which is due to come out. We have committed, in a payments forward plan, that that consultation will come out by the end of the second quarter, so reasonably soon, but those are matters that will be consulted on by the Government, so will be considered and determined as part of that process.
Q169 Baroness Donaghy: Good morning, Minister. I am trying to get to the bottom of—to get some clarity about—who is ultimately responsible for the competition and innovation, and how that relates to the growth of stablecoin. The Treasury has given the Bank an innovation objective, but not one for competition or competitiveness and growth. Is it satisfactory that the Bank does not have to consider such objectives when designing regulations for stablecoin? Do the FCA’s competition and secondary international competitiveness and growth objectives mean that it has greater responsibility for the commercial viability of stablecoin than the Bank? How do those things relate to government responsibility?
Lucy Rigby: I have been very clear about the Government’s view on the development of GBP-denominated stablecoin. With specific reference to the Bank having a secondary objective on innovation, that innovation objective for the Bank is tied only to CCPs and CSDs, so it is not a wider objective that would pertain to stablecoin, just to be clear about that. Nevertheless, in the way in which the Bank of England has consulted on its regime for systemic stablecoin, and indeed as it works to finalise its proposals, it is taking into account a range of views. I know that some of those views would like to see a more pro-innovation stance, but the Bank, in running that consultation, is going about things in the right way.
If I might come to the importance of the Bank’s central objective, which of course is financial stability and the wider soundness of our financial system, I think we would all agree that that is what we want the Bank to be concerned with. You are right to make the distinction in the objectives as between the Bank and the FCA, as I understood you to be doing, if I understood correctly.
Baroness Donaghy: I am intrigued that at the moment the main product in this area would be the United States of America. The existence of UK-related stablecoin is negligible. It is a product that does not yet exist. Who is going to take responsibility? Are we actually encouraging the growth of something that at the moment, as you say, is nascent?
Lucy Rigby: The Government are taking the right approach to something that we recognise has clear benefits. The potential that stablecoin has to be used particularly in cross-border transactions is significant. That goes to quicker and faster transactions, but also programmable transactions and the potential for, in theory, 24/7 settlement in relation to these things. In all those things there is the wider economic impact that, in theory, from a business point of view, is freeing up capital that could be spent on other things.
We recognise that there are real benefits that could come from wholesale and retail use of stablecoin. Despite the fact that the market is nascent, as you say, in the UK at the moment, because of our recognition of those benefits and desire to get the regulation right when it comes to financial stability but also consumer protection in its broadest sense, we think that the right thing to do is to lay those regulatory foundations in anticipation and encourage the growth of something that could be really beneficial for this country.
Q170 Lord Griffiths of Fforestfach: I would like to ask one question about the Treasury’s view on the following issue. The PRA has a statutory objective to promote the safety and soundness of banks. However, with respect to stablecoins, it is said that it prohibits banks from engaging in stablecoin business. I wonder whether you feel that that is, in a way, overregulation.
Lucy Rigby: The short answer is no. The Bank’s underlying objective there is to ensure that there is sufficient consumer protection from the point of view of whether, if a bank were to issue a stablecoin, there would be sufficient distinction, from a consumer-facing point of view, as between that product and other things that the bank is doing for which consumers receive protection. There is a distinction to be made, in the sense that separate, non-banking, insolvency-remote entities within the same group structure may issue a stablecoin with the provision that there is that distinct branding between different products. The root of the divergence is for the purposes of consumer protection.
Lord Griffiths of Fforestfach: Could I follow up? One thing that has impressed me, knowing very little about the subject, is the number of people who you feel would like to get into this business. The one thing they keep saying all the time, and the most recent one was on the trade body for the industry for this area, is that, compared to other countries in the world, we are probably the slowest in getting started.
I can see that we need to have financial stability and therefore it is very important we get that right. Within that, do you feel that the Treasury might give slightly more of a push in this area—my first question is really a subset of that—in order to meet the objection that the UK has been very slow in getting off?
Lucy Rigby: To answer the question via your first point in the first instance, there are counterarguments to what I just said about the distinction from a consumer facing point of view. I have listened, and will continue to listen, to some of those. I come back to my response to the Chair just previously. I really reject the accusation that we are behind.
We are now very much moving at pace, for the reasons I have set out. We’ve laid the regime. There were moves prior to that when it comes to other aspects of regulation in this space, notably in relation to financial promotions and money laundering. The laying of the regime is intended to give industry that confidence to invest and innovate here in the UK.
There is tremendous potential for us to be able to create those conditions for a flourishing GBP-denominated stablecoin market. We have, as you know, great strengths in our currency. As stablecoin develops, there is quite significant potential for people to want to transact in GBP stablecoin. There is real potential there. I am committed to ensuring that we get those conditions for growth right here in the UK. There are huge benefits for consumers and businesses, but I do not shy away from the fact that the regulation in this area is really important and we have to get it right.
Q171 Lord Lilley: Continuing on the same theme, I agree with everything you said at the beginning about the importance of Britain remaining at the forefront of innovation. I am glad that you are saying we are now moving with pace, but it is quite clear from our evidence that the Bank was not moving at pace. The Bank was initially hostile to this and has slowly changed its mind.
We understand from the Bank itself, and from people who object to it, that the Bank is going to require 100% convertible asset backing, which makes them sounder than bank deposit money. Banks themselves will not be able, at least under their own name, to provide this. There be maximum holdings anyone can have of these.
We have heard from individuals saying that any one of those three constraints will stop a stablecoin developing in this country. Are you nudging the Bank and the FCA to move to the normal British approach, which is that anything is permitted unless it is forbidden? The Bank seems to be saying that everything should be forbidden unless it is permitted. You are a lawyer, so you will know that that is true.
Lucy Rigby: On behalf of Government, the Bank and the FCA, we are aligned in the sense of wanting to provide the right foundations for the development of the stablecoin market here in the UK. You refer specifically to aspects of the regime that the Bank has been consulting on vis-à-vis systemic stablecoin—it is important to note that that is systemic stablecoin—including in relation to backing assets and holding limits. I myself have had plenty of engagement with industry on those two issues in particular.
You will be aware, I am sure, that the Bank has moved in its stance when it comes to backing assets, which I understood was well received. It continues to consider the input from the consultation.
When it comes to holding limits, I ought to say that the Bank’s chief concern vis-à-vis holding limits is to mitigate the risk of disintermediation. That is why it is suggesting that these holding limits ought to apply.
I think that there has been an acknowledgement that, as the market grows, the requirements in relation to both of those things may evolve. It is important that the Bank, as well as the FCA, is continuing to consider all these things, as we develop the regime as a whole. I believe that it is doing so in good faith.
Lord Lilley: I am sure you are right.
Q172 Lord Davies of Brixton: I understand the argument that part of our economic success requires a successful City of London, and a successful financial sector, more generally, needs to offer the broad range of services, which includes a stablecoin. You have answered the specific question I was going to ask, but could you expand on the use case for a sterling stablecoin? What does it offer that the already available dollar stablecoins do not provide?
Lucy Rigby: You are right that I touched on it, but let me try to expand on what I said. There is the potential for local currency stablecoins, so non-dollar stablecoins, of which GBP is obviously one, to gain traction—we are seeing that globally—for real payment use cases because of attachment that there is domestically for domestic currency, which makes sense. There is also the point of view of businesses wanting to avoid foreign exchange transactions as well. If you are able to transact in local currency, you would.
Sterling is the fourth largest currency in global FX reserve, so there is a very credible basis on which to suggest that there will be a global role for GBP-denominated stablecoins. To come back to the way your question started about the overall competitiveness, developing the GBP-denominated stablecoin markets has the potential to enhance our UK financial services offering as a whole, because of the way in which stablecoin can impact on the greater use of digital assets more broadly, via its use as a settlement instrument on chain, which catalyses the greater use of other tokenised assets.
Lord Davies of Brixton: I will press you on that. The evidence we have suggests that the intranational payment system in the UK works very well, particularly compared with the States. I cannot see, if you are paying someone else in the UK, why on earth you would want to use a stablecoin when you can do it very easily anyway.
That brings us to international payments. Although we can proudly say we are the fourth largest, it is still a very small figure. It is overwhelmingly in dollars. Are you taking it for granted that the UK-issued stablecoin would be in sterling? Is that an absolute requirement? I am sure this is slightly muddled thinking, but you could, in a sense, have a euro-dollar stablecoin based in London.
Lucy Rigby: To come back to the fourth largest point, to be clear, that was a reference to the fourth largest currency in global FX reserves. I was stating that fact with a view to trying to explain why there is a credible basis.
Lord Davies of Brixton: I took you to mean in terms of transactions.
Lucy Rigby: No, sorry. I was no doubt unclear. You are right. We have a really strong, and world-leading in fact, payments landscape here in the UK. We benefit already from a diverse landscape that brings benefits for businesses and consumers alike. Those benefits will continue to exist only if—and this applies to financial services as a whole—we continue to embrace innovation. That is why we have been so successful as a country in financial services over many years, or centuries in fact.
I firmly believe that we have to continue to embrace innovation; otherwise we will lose our status, which we are all rightly very proud of, and for good reason, I say. I come back to the points that we were talking about at the start, in relation to the role that financial services plays within our real economy as well as anything else.
Lord Davies of Brixton: Can I press you on whether the UK stablecoin has to be in sterling?
Lucy Rigby: There are real benefits, some of which I have outlined to you, in a GBP-denominated stablecoin and our development of that market.
William Morello: We have not placed a legal requirement in our regime that they have to be denominated in GBP.
Q173 Lord Turnbull: In the written evidence that the Treasury submitted to this committee, it said “The FCA is at an advanced stage of consulting on its detailed rules and plans to publish its final approach this year. Separately, the Bank of England has consulted on its approach to regulating systemic stablecoins”. It then goes on to say, “These developments are already giving firms the certainty needed to pursue stablecoin business in the UK”.
I have to say that many of the people who have come here have said exactly the opposite. They said that, if the proposals as they now stand are in fact the ones that appear in the final thing, they would not be very interested in it. “Thanks, but no thanks”. Is there any disposition on the part of the three players—that is the Treasury, the Bank and the FCA—in these final decisions of what to put into the final regulation to rethink any of the conditions that are currently in the proposals?
Lucy Rigby: I want to acknowledge the understandable desire on the part of industry to be able to crack on. I come back to our role as government and as regulators, which is to ensure that the regulation in this area is right, not only from the point of view of protection but also to enable the kind of growth and investment that we want to see. The Financial Conduct Authority has the digital securities sandbox, which it may speak about later on today, in which a number of firms are participating, with a view to testing the various use cases that exist to be able to then bring those use cases to market. That is one example of some of the work that is going on. When our regime comes into force proper from October 2027, we expect to see this market really taking off.
Lord Turnbull: We will see. Holding limits for ordinary families at retail level, for the most part, are irrelevant. They will not want to hold those six-figure sums. But there are various life events, such as inheritance, moving house or sale of a business on retirement, where you could have people quite often finding that they are dealing with seven-figure sums. If they cannot hold beyond a limit set of six figures, how do they get access to the stablecoin regime precisely at the point when they really want to use it?
Lucy Rigby: It is important, and this is also relevant to your last question, that the Bank’s regime goes to systemic stablecoin. Ultimately, what is systemic will be judged on a case-by-case basis by the Treasury.
With regard to holding limits specifically, as we were discussing previously, I recognise that there is a real strength of feeling in relation to this particular aspect of the potential regime. There are legitimate questions that have certainly been raised with me and that I know that the Bank is considering around not just how holding limits might impact on the growth of the industry, but on things such as enforceability. How is this actually going to work? As I said, I know that the Bank is thinking about those things very carefully. It will come forward with its final proposals when it is ready to do that.
Lord Turnbull: Will there be flexibility in the system so that, when a family is faced with one of these life events with a very large sum of money, which will probably only happen once or twice in their lifetime, they can get access to stablecoins? Will the regime still freeze them out?
Laura Mountford: The Bank of England’s consultation specifically spoke around there being consideration of exemptions that could be considered on the corporate side of the limits. I do not recall that the consultation spoke specifically on the individual holding limits that the Bank had proposed, but it has certainly opened that as an area of exploration around there being an exemption where it was required for corporate business. That was an area that was considered.
Lord Turnbull: That would rule out inheritance and moving house, which seem to me the only areas that ordinary people really want to use it for.
William Morello: The Bank has also said that it sees the holding limits as a transitional measure. This is about trying to mitigate any risks during the period of potentially fast growth within the stablecoin market of there being a move away from bank deposits and disintermediation of banks. It has not been proposed as necessarily being something that would be in place in perpetuity.
Q174 Baroness Bowles of Berkhamsted: I would like to try to pin down a few more specific things in the area of systemic risk. It has already been referenced in the sense that the gilts backing might give rise to it and there might be solvency risks. You said that part of this is getting the regulations right.
We are in this transitional position at the moment, where I suppose a lot of responsibility is still with the Treasury. For example, you have yet to determine which stablecoin issuers are going to be systemically important. What criteria are going to be used for that? How many are left not systemic although they contribute to the overall systemic effect in terms of their holdings? If it all goes wrong, who does it come back on? Is it the Treasury, or you? Everybody is keen to know how big they are going to have to be before they are going to be systemically important, or is it the kinds of transactions? Are there any ideas on the criteria yet?
Lucy Rigby: I absolutely recognise that there is a real hunger and a desire to understand what exactly is going to be systemic and what is not, in anyone’s judgment. The criteria that will be used to assess systemic nature, or not, are set out in financial services legislation, so the Banking Act 2009 specifically, as amended by FSMA 2023. The legislation states that the Treasury may make a recognition order, so recognise that something is systemic, only if it is satisfied that disruption to the provision of services by that provider could threaten stability or confidence in the UK financial system or otherwise have serious consequences.
Clearly, in making that assessment, the Treasury will want to look at the value involved in a particular, in this case, stablecoin and the nature of the services that are being provided in exactly that regard. The substitutability, in that particular instance, of the product with any other product is also important.
Baroness Bowles of Berkhamsted: I am trying to work out what is going to be the norm within that. As you read it, it sounds like something is going to have to be very big indeed before it would tick the systemic box, whereas, if you are going to look at disruption further down, maybe it is the case. Until you have said it is systemic, it is not with the Bank of England; it is back with the Treasury. How is the Treasury going to be monitoring and looking at that?
Lucy Rigby: There is a dual regulation regime. When something is systemic, the Bank will regulate from a prudential point of view. For non-systemic, the FCA will regulate in the way that we have given rise to by virtue of the recent legislation that I referred to from an authorisation and supervision point of view. From a payments point of view specifically, there are changes that would need to be made there to bring stablecoin within the regulated landscape for payments and, in doing so, give consumers the protection that they would get from any other payment services being regulated by the FCA.
To come back to the premise of the question, which I think was saying, “Give us a bit more on what is systemic”, there is some comfort in the wording of what may be done when a recognition order can be made. As I said, it is about being satisfied of disruption to the provision of services, which you referred to. Then the next part is that that disruption could threaten stability or confidence in the UK financial system or have serious consequences. That is putting the bar in a particular place.
Baroness Bowles of Berkhamsted: It sounds like a high bar. It sounds like a very high bar.
Laura Mountford: It is a regime that is drawing on the regime that has been in place for systemic payment systems as well. I think that there are around eight systems, but we can confirm the precise number, that have been recognised as systemic. That includes the likes of Mastercard most recently, in recent years. That gives an indication of the number and size that we have seen in the traditional payments space. These have been very large firms.
There has been consideration around where there have been services seeking to launch that have engaged with regulators in the UK. A recent example of another firm that was recognised as systemic was Fnality Payment System, which was looking to scale very quickly. There was active engagement with the regulators around its plans in the UK. The regulator—the Bank of England—made its assessment to support Treasury in its decision around what should be recognised as systemic as well.
Baroness Bowles of Berkhamsted: What about systemic effects and the collective effects? That is going away from individual institutions, which you have probably explained as well as you can as to how they would come in. Are all the collective systemic effects with the Bank of England?
Lucy Rigby: The regulation vis-à-vis the Bank of England applies on a firm-specific basis from the point of view of the things that we have just been discussing. Backing assets, for example, are on a per-coin basis.
Baroness Bowles of Berkhamsted: Yes, but they all have the same backing assets when it is gilt. If there is something trending and some effect, will there not possibly be contagion, or will they all be hit with the same thing at the same time?
Laura Mountford: This is an area where, within the legislation, there is the ability to consider, as part of the assessment, the interconnectedness between coins as well, which can form part of the assessment for what is made systemic. It considers, as the Minister says, substitutability. It can take into account interconnectedness as well.
Baroness Bowles of Berkhamsted: The answer is that it is all being looked at and we still wonder how it works.
Lucy Rigby: Yes, to a degree, but it is important to note that we want the regulation to be fit for purpose at the point at which the market is, and then sufficiently nimble to be able to adapt to that. As we have discussed, in the UK at the moment stablecoin is nascent. Some of the risks that we are talking about here go to pretty far down the road, which I am not suggesting is wrong to consider. I think we should, but it is, in effect, a situation where stablecoin becomes a very significant form of private money that competes with existing forms of private money, notably commercial bank deposits. I come back to the importance, therefore, of getting the regulation right when it comes to capital and liquidity requirements and consumer protection more broadly.
Baroness Bowles of Berkhamsted: Have you a figure in mind in percentage terms as to when all these things might click in, in terms of the volume within the payment system, or is that yet to be thought about?
Lucy Rigby: I am not sure that there is a specific percentage, no.
Q175 Lord Eatwell: Good morning, Minister. We had evidence to this committee that the main consequence of the growth of US stablecoins has been to give access to the American banking system for players who would otherwise not have had access to the American banking system. I suggest by analogy that the growth of sterling stablecoins will give access to the British banking system for players who otherwise would not have had access.
We also have had evidence from, and indeed an admission from, the Bank of England that it will not have KYC over stablecoins held in private wallets. In other words, it will not know the nature of the beneficial owners of stablecoins held in that way. Are you not concerned, Minister, that, in your enthusiasm for innovation, you are not actually creating a new mechanism for the financing of crime?
Lucy Rigby: It is perfectly possible to be as pro-innovation and pro-growth as this Government are while also taking a tough approach to all forms of illicit finance, and indeed to economic crime much more broadly. Inherent in your question is a recognition that some aspects of crypto assets have historically been attractive to criminal actors. That is a very important consideration in aspects of government policy that go to cracking down on economic crime.
Lord Eatwell: Given that the Bank of England has told us that it will not have sight of the holders of stablecoins held in private wallets, what are you going to do about it?
Lucy Rigby: I might bring one of my officials in, because there is a degree of complexity in the hosting of wallets and who can access and identify individuals, depending on the type of wallet that that is. At a slightly higher level, we are making pretty significant reforms to our money laundering regime. New powers have come into force via ECCTA 2023 for the purposes of seizure of some of these assets, which is really important.
Within my brief, I have the economic sanctions piece of work as well, as in OFSI. OFSI has recently delivered a threat assessment when it comes to crypto assets, in order to support industry in compliance efforts in all of this regard.
I want to be sufficiently robust in my answer to your question that we are very alive to the risks when it comes to economic crime in this area. We are making moves, including from an enforcement point of view, to deal with those. I will turn to either Will or Laura on wallets.
Laura Mountford: On self-hosted wallets, you are correct that the KYC requirements do not apply directly. If those wallets come into contact with any regulated crypto businesses doing regulated crypto activities, the AML requirements that bite on those firms extend to the services that they are offering to self-hosted wallets.
It was also an area of focus in the most recent national risk assessment, which was looking at the illicit use of crypto assets, where it specifically considered the use of peer-to-peer exchanges and self-hosted wallets. The conclusion in that, on which monitoring needs to continue, was that, at the moment, the level of trust that exists entirely in that space means that they are not likely to be used at scale. It is something that was considered through the national risk assessment and the Government will need to consider and assess.
The other point is that there may be valid reasons that people wish to hold these self-hosted wallets. This will not be solely for illicit use. There will also be touchpoints where these wallets are interacting, as I said, with the regulated system to move funds into fiat again. Then you see the requirements bite. As the Minister said, it is not as straightforward as saying this is not captured at all. There will be instances where it is, but it is also being considered through the national risk assessment, so we are alive to the exact risk that you are talking about.
Q176 Lord Hollick: Following up on that point, as an individual, if you make a payment through one of the existing payment systems, if it goes awry for all kinds of reasons, you know who is at the other end and, in most cases, you can get the money back. How will you do that on this system?
Lucy Rigby: It is a really good question and it goes to some of the intended reform that we have been talking about. Stablecoins might move into the retail payment space, for the reasons that I have said. There is good reason to expect that that will happen, because there are likely to be benefits in that regard. By bringing stablecoin into the regulated landscape—the regulation that you referred to there applies to other firms in this space—consumers would have the same level of protection.
That is important in and of itself, but it is also important from the point of view of some of the wider objectives that we have been discussing around growth. We know that having the right level of regulation and protection in place can go to giving trust and instilling confidence in the uses of particular types of technology. It is an important question to be asking and we have been thinking about the same thing.
Lord Hollick: Your enthusiasm to make sure that we play a full part in digital currencies is very much approved of, but the witnesses we have heard from have basically said that the idea dies on arrival because of the 40% of the backing assets that are not allowed to earn interest. How do we work our way through that rather obvious problem?
Lucy Rigby: From my understanding, but I would invite my officials to come in on this point too, the approach in terms of earning interest is aligned with other jurisdictions.
William Morello: This is for the Bank systemic regime, presumably, where it is limiting the percentage of backing assets.
Lord Hollick: We were told that the 40% was rather higher than other regimes.
The Chair: It is higher than any other regime.
William Morello: The latest proposals from the Bank of England have been for a 60/40 split, in terms of 40% unremunerated central bank reserves and 60% in short-term government debt. A bit like holding limits, this is one area where the Bank is consulting. It is engaging with industry and listening to representations with a view to ensuring that we ultimately end up, in the UK, in the best possible place when it comes to managing the financial stability risk for systemic stablecoin and harnessing opportunities.
Lord Hollick: The Treasury is going to have to intervene on this if we want to get it off the ground, because at the moment, as I say, it is dead on arrival.
Lucy Rigby: The Bank is yet to come forward with its final proposals. We know that it is considering all of these issues.
Lord Hollick: You make a very good point about competition with the existing banks in terms of use by the public and corporations. One advantage of having money with the bank is that they occasionally pay some interest on money that you have deposited with them. Sometimes it is not as much as you want, but nevertheless there is some interest there. One or two other regimes have a prohibition on paying interest on stablecoins. How are you going to address that factor in the UK?
Lucy Rigby: My understanding is that there is alignment on that particular aspect, and the approach by the Bank and the FCA, with the US and the EU. Your question, if I might, goes to the complementarity of stablecoin vis-à-vis the banking system as a whole. As I have just said, we see that as a complementary relationship. I have talked about the benefits of, when it comes to payments, having a diverse landscape from the point of view of competition. There are real benefits that come from the growth of a GBP-denominated stablecoin for the country as a whole, as well as for consumers and businesses.
Lord Hollick: Yes, because, if it is going to be competitive, clearly it needs to be able to provide depositors, holders, or whatever you like, some sort of income. I think that in the United States they circumvent that by giving Green Shield stamps, or something, and other benefits. I presume that, when you are looking at both these issues, so the 40% and no payment of any benefit, if you like, on having a holding, you are going to have to look at it in the context of what works in the marketplace.
Lucy Rigby: I wholeheartedly agree. The premise of the question, and indeed other questions as well, has been about ensuring that we have the right regulatory landscape to allow for the wider objective of growth, confidence and investment here. I reiterate that we—“we” being everybody—have to get that right; otherwise we will not get to where we want to be.
Lord Hollick: As well as that, there is the protection of people who make a wrong payment and cannot get the money back. Insurance on all of those fronts is going to be very important to make this fly.
Q177 Lord Sharkey: I would like to finish where we started, with the notion of speed of progress. You noticed that the market for euro stablecoins grew tenfold following the introduction of MiCA. Does that not suggest that the UK needs to move more quickly so that the potential market for GBP stablecoins is not occupied by our European friends?
Lucy Rigby: There are key differences between our regime and the European regime, including that we are not setting everything out in primary legislation, but, in the usual way, allowing our regulators a degree of discretion. A nimbleness and ability to evolve and react as markets develop comes with that.
Your question is about whether we need to move more quickly. I hope that I have been clear today about my commitment to doing everything I can to ensure that we achieve our objective in this area, which is fully embracing innovation when it comes to stablecoin, and indeed to crypto assets more broadly as well. The laying of the regime in the way that we have is absolutely key to allowing firms the certainty that that will come, such that they can start to invest and make those decisions about the UK market.
The Chair: Minister, thank you very much for your time this morning. You have been generous with your time and I am very grateful to you for giving evidence to us for this session, so thank you very much.
Lucy Rigby: A pleasure.
