20
Examination of witnesses
David Geale and Matthew Long.
Q178 The Chair: We now move to the second part of today’s meeting, which is the 16th and final oral evidence session as part of the committee’s inquiry into the growth and regulation of stablecoins. Thank you to Mr Geale, the FCA’s executive director for payments, and his colleague Mr Long, who is the director of payments at the FCA. This session is open to the public, broadcast live and subsequently available on the parliamentary website. A verbatim transcript will be taken of the evidence and will be put on the parliamentary website.
We will go straight into questions. I will start with a question on the requirements for redemption. The current stablecoin business model, as it has evolved, relies heavily on secondary markets in order to facilitate stablecoin conversion into fiat currency. The FCA’s proposed rules involve a right of redemption against the stablecoin issuer. Is it the FCA’s intent to change the current business model as it applies?
David Geale: I would not say it is our intent to change the business model. We are building a regime from the ground up that we think reflects the risks in this market and, equally, seeks to encourage innovation and growth.
We have consulted on a whole range of measures including as they relate to redemption. We have also taken quite a lot of feedback on that. We have watched this committee with interest and we will continue to feed that in. We have not taken any final decisions as yet, but in essence we are looking at the market as it is developing both in the UK and overseas.
On redemptions, we have heard feedback as part of our consultation that there may be some challenges where firms have not perhaps carried out KYC already. We will reflect on that and think about what is most appropriate. We want to harness the benefits of stablecoins, which are around having something that is clear, is quick or faster, and does what consumers expect it to do.
I would not say we are seeking to change business models as such, but we are seeking to design the regime in the right way.
The Chair: In the FCA’s mind, do you see individual consumers going to the issuer and saying, “I want conversion into fiat currency”? That is what causes the practical problems, as I understand it. How does the FCA see it working in practice?
Matthew Long: We have put in a T+1 requirement. That is because we want anybody to be able to redeem a stablecoin at par.
We have had feedback that, for those that have not had an interaction recently, that could be unreasonable around the know your customer checks, particularly if there was enhanced due diligence.
We are specifically looking at the timescale beforehand and the activity that needs to be done. That will be something that we resolve over the next few months in readiness for our policy statement in the summer. We have heard it and have explored it with firms. We are directly looking at it.
The Chair: You have taken on board the concern that it is simply not feasible.
Matthew Long: I am not sure we agree it is not feasible.
The Chair: Within the one-day timeline.
Matthew Long: Technically, it is a two-day timeline. I am not sure we have agreed that it is not feasible, but we are reflecting on at what point it comes in and the barriers to it. We have sat down with the firms that have given that feedback and worked through what the business models might be. We will, I hope, come up with something that is helpful.
Q179 The Chair: Could I ask a question on regulatory sandboxes? What is the FCA intending to get from the use of sandboxes and stablecoins?
David Geale: Sandboxes have been a feature of our regulation for over 10 years now. It is something that we brought in as a world first but has been copied in jurisdictions around the world.
I see a number of benefits from that. First, it is a safe place for firms to bring something and test it within certain guardrails. We can make sure that there are controls that mean consumers do not lose out if something goes wrong or does not work quite as intended.
In this particular instance, where we are designing a regime, it gives us an opportunity to test and see what works. Coming back to the question you have just asked, for example, we could test that and ask, “What is the feasibility of the approach that we have proposed? Does it cause practical problems? If so, what and why?”
We would go through a series of steps, including understanding what the firm is seeking to do, scoping a test and then potentially even doing live testing in our digital securities sandbox. It helps us design and refine policy. It helps us get to the final solutions in terms of what we think is the right regime and the right regulation to harness the benefits while controlling the risks.
The Chair: I can see why a cautious regulator would like to take that approach. Do you agree with the assessment that it can sometimes lead to considerable delay in the evolution of the regulatory approach? As it was characterised by one of our witnesses, the sandbox is where innovatory ideas go to die.
David Geale: I completely reject that, to be frank. We have been developing our regulation in line with a forward plan that we set out some time ago. We have gone through a series of consultations. We have done a huge amount of industry engagement, including through tech sprints, where we have looked at potential use cases. We have worked through specific problems with large groups of firms.
The sandbox is another tool in our toolkit that we can use to help us refine things. It is not the driver for the policy. The policy is being designed and moving forward alongside that.
I see it as an opportunity. I certainly do not see it as a problem or as a blockage. I certainly do not see it slowing down. There are numerous businesses who have been through the sandbox who would say it was an incredibly useful exercise for them to test, refine and get something right first time. I completely disagree with that suggestion.
Matthew Long: Perhaps I could give you the example of the current sandbox. We had 20 applications into the policy. There are four in there. One is looking at wholesale; one is a firm that is launching a GBP stablecoin; another is a UK bank, where we are looking at how the policy would interact with that system and structure. I have seen the types of question coming out where we say, “Okay, how would the infrastructure for you work against the policy?” If we resolve that now, we do not get a problem when we open the gateway or a later point. We are working through those issues directly, clearly and together.
This is how the sandbox is being used. As David has mentioned, it has been copied worldwide. This is a really good example of where we are taking an innovative step forward.
Q180 Lord Smith of Kelvin: Good morning. As you know, stablecoins are currently regulated under the FSMA regime, but HM Treasury has indicated that it has plans to bring them into the regulatory perimeter for payments. What practical effects will that have for stablecoin issuers and indeed for consumers?
David Geale: Good morning. To my mind, there is a choice about how you regulate these. The opportunities given to us by modernising the payments regime or the payments regulations are huge across payments as a whole. There are a variety of areas where we would say that there are differences between the regime for payment firms compared to banks, but the same activity is taking place and yet consumers potentially have different protections in place. Taking a step back, modernising the payments regulations is a really positive step and I am very much welcome it.
If we are looking at stablecoin payments, we are looking at another form of payment. It is healthy to have choice in the market, whether that is through stablecoins, the existing mechanisms or indeed something else that may come along. We are discussing tokenised deposits. Having some predictability and harmonisation between the regimes, where appropriate, is very helpful.
It remains to be seen quite what the approach will be to modernising the payment regulations, including what it means for stablecoin, but at the principled level having something that is common across the piece or gives us a common framework is helpful.
Q181 Baroness Donaghy: On this tack about the international competitiveness and growth objective, which is more formally in your bailiwick compared with the previous session, how do the FCA proposals on stablecoin regulation align with its secondary international competitiveness and growth objective?
I will perhaps give you notice of a follow-up. What discussions would you have with the Bank of England, for which this is not the primary objective, about other aspects such as stability or the protection of consumer?
David Geale: Perhaps I will take the macro level of that question and Matthew can talk to some of the work that he has been doing, working with international regulators.
Very clearly, as we look to design our regime, we look at other jurisdictions. We are looking at what is going on. We are looking at the experiences that they have, but we also have to design what we think is right for the UK. We are very alive to the fact that we want to support growth. That is one of the areas in our strategy. We also have, as you say, a secondary competitiveness objective. We are very alive to that as well.
There is a place for GBP stablecoins. If it grows as an option and as an alternative payment method for people, that is a good thing. It will bring competition to the market. It can make things faster. It can make things cheaper. It can enable more cross-border payments to be made more effectively for a wide range of wholesale and retail users.
We have watched very closely what is going on in the US and Europe in particular. We engage with them on a regular basis. We also look at the feedback that they get.
I know you touched on reward earlier on, for example, and what that looks like. We look at the feedback that is coming out in the US, the move from the GENIUS Act to the CLARITY Act, and what was playing into that debate. We can learn from that as we go, but, as I say, it is really about designing what is right for the UK.
We work with the Bank on a daily basis. A week does not go by where we do not talk to the Bank about payments, as you would expect. We have both heard the feedback around the transition from non-systemic to systemic payments and some of the differences. We are very alive to that. In the summer, we intend to put out a statement about what we think that transition looks like. As stablecoin grows and it perhaps moves from a non-systemic to a systemic regime, we do not want that to be a cliff edge. How can that happen in an appropriate way?
We have that debate on a regular basis. We have also shared our approach to the various different issues. I would recognise that there is a difference between something systemic and something not systemic for the protections that people would expect to be in place.
It might be helpful if Matthew just touches on this point. For example, Matthew chairs one of the working groups at IOSCO. You might want to talk about some of the international engagement that we have done, Matthew.
Matthew Long: One of the positions that we have adopted as the FCA is that we need to be a global leader. We need to be a global leader because these assets, as we heard in the previous session, move in seconds, et cetera.
We have done two things. First, I have chaired the International Organization of Securities Commissions group on digital assets. We came up with recommendations globally about what good should look like. That is quite challenging, because regulators globally may treat it on a securities or an activities basis. There are all those different ways of approaching digital assets. We set a baseline with those recommendations.
We then took a step forward beyond that. We tested a number of jurisdictions and asked them how they are doing against each of these recommendations. That work will continue for the next year or so.
Secondarily, we are part of the Financial Stability Board, as you all know. The FSB did a very specific piece of work on stablecoins, which we were part of. We took part in the drafting and the recommendations.
Finally, we brought all those people together here in London, regulators, firms and other standard-setting bodies, and asked, “How are we going to be front-footed and what do we need to do?” We have come up with recommendations around international co-operation. In fact, shortly after this meeting, I am going to a meeting to discuss how we can make that better globally so we can see that flow between countries.
It is not easy because there are differences globally, but we have looked at it from both a stability and a security point of view.
Baroness Donaghy: This is maybe where I am going to reveal my ignorance or innocence; I am not sure which. Normally, you have a product and your job would be to create regulations that protect consumers as best you can and balance that with helping UK plc, which we all want. In this case, there is no product—the emperor has no clothes—apart from a very big American product. Is this not a very unusual setup? We are creating this regulatory regime when there is nobody from the UK knocking at the door.
David Geale: It is not that unusual. It is something that we see a lot of interest in. As Matthew said, we have four firms in our sandbox. We are working with a number of others. It is something that exists in other jurisdictions. It is going to be used in the UK. There is a question about what the UK regime looks like to enable the UK to be in that game. That is what we are trying to develop.
There are other areas that I have discussed with other members of the committee at different times. Peer-to-peer lending started very small, as did equity-based crowdfunding. You have to design something as something starts to take hold and starts to grow.
We see the green shoots of activity. We think there is a real opportunity to drive something that can be faster. You can have smart contracts. You can have cheaper payments. While we say that the payments environment works very well, as part of my role in the Payment Systems Regulator we have looked at areas such as the fees that cards charge to merchants. We have made the conclusion that they are too high. Having stablecoins, which may present an opportunity to make things faster and cheaper, brings competition into that market.
There is still absolutely a place for cards and they do a good job, but bringing competition in and setting the environment for that to come in and operate safely is really important. If we do not get that safely part right, it potentially dies a death because, if it goes wrong, people lose trust. If people do not trust it, it will not scale.
The Chair: Can I just get this right? In applying the FCA’s secondary competitiveness and growth objective, your first port of call is to go and talk to other regulators.
David Geale: No. Our first port of call is to think about what is right for the UK, but it is really important—
The Chair: The actions that your colleague described were all about talking to other regulators.
David Geale: Matthew can respond to that, but, from my perspective, we play a role on an international stage. Stablecoins operate cross-border, and payments operate cross-border. It is not helpful to have completely fragmented global regulation, but it is important that what we have is right for the UK. In order to have what is right for the UK, we need to understand the UK market and the needs of UK consumers, businesses and firms.
If we do not understand what is going on in other jurisdictions, it will all happen in other jurisdictions and the UK will lose out. Looking at other regulators is not our starting point—I certainly would not see it as that—but we should absolutely be alive to that.
Matthew Long: We are absolutely passionate about having a sustainable and positive economic position in terms of stablecoins in the UK, but we speak to other regulators globally. Indeed, a lot of the criticism we get from firms is, “You’re not interacting with the other regulators”. Where a firm that we supervise has one foot in the UK and one foot in the US, if our rules are not compatible, that firm has to do twice as much work to operate in two separate places. It is my job to try to remove some of those barriers for firms. That is the feedback that we consistently get about things that are impediments and that make things difficult. That is why we do the international co-operation.
We work with our closest allies in the EU to balance our regime with MiCA, which came first, and ultimately with the US, potentially, in that order. We have to make sure that that can work as a system for the citizens of the UK, and for firms that are in the UK and other countries that operate across both those boundaries.
It is very much about getting the UK right, but it is also about making sure that there are not impediments that cause serious issues for firms at a later date.
Q182 Lord Griffiths of Fforestfach: We sympathise with the fact that you had to work with the Bank of England, the Treasury, the PRA and so on in doing what you were doing. That complicates matters. But you have a secondary objective, as has been mentioned by my colleague here, on competition.
You also have the fact that the PRA has banned people who issue stablecoins from paying interest on the assets, which are on the other side of the balance sheet. If the market takes off as we think it will, it is clearly going to be a very competitive market. The financial markets as we see them operating today are very competitive, so we should expect this market to become very competitive.
If you now put in a ceiling such that higher rates cannot be paid on the assets that they hold, they clearly are going to find other ways around that. From an economist’s point of view, it is much the same problem as having rent control. You fix the rents, but people find all sorts of other ways to negotiate and do better. If you really want to carry out your competitive objective, I cannot see how you will not run into serious trouble with people doing all sorts of other things through the back door in order to compete effectively with each other.
David Geale: First, we have a primary objective on competition. The secondary one is on international competitiveness. We look at the two from the FCA perspective.
I do not want to answer for the Bank, but we are potentially conflating two things. There is what can be paid to consumers. We have said that you would not expect people to treat stablecoin as an investment at this stage. That is certainly not how we look at it. As well as the element of holding, there is the element of using it for payments.
As I say, we have had feedback on the reward point. It is fair to say that we have not had much pushback at all on not paying interest to individuals for holding stablecoin, but there have been questions raised about other forms of reward for transactions. If you use a credit card, you may get points or something like that. We will reflect on that. We have not made any decisions. That is also something that is being reflected on in other jurisdictions. We need to think about that through a payments lens.
On the holding of the backing assets, in terms of the PRA or the Bank of England’s proposals, that is really a question for them, but, again, I know they have heard the feedback. That is something for them to decide. From our perspective, we do not necessarily see this as an investment. We see it as a means of payment.
Lord Griffiths of Fforestfach: Given your extensive exchange with other regulatory agencies worldwide, is there anything you observe in other countries on this competitiveness issue that may be relevant to the way you think of taking it forward?
David Geale: Again, what we design in terms of encouraging firms to come to the UK and do business in the UK, in a manner that still provides the right protections that UK businesses and consumers would expect, is critical.
We will take account of the feedback that we have had. Clearly, in some areas, that is coming from what people see in other jurisdictions. Again, I would stress that we have not made any decisions on this. We may not move on all or any of it, for that matter. We will make the decisions based on the evidence that we see.
We have had feedback on the approach to reward. That is something that has also been raised in other jurisdictions. We have had feedback on things such as the calibration of the prudential requirements and the nature of the backing assets. Those are the key areas.
Matthew, I do not know whether there is anything that you want to add, but we are alive to all of that. Making sure that what we do is right for us and, equally, that the UK has a chance to be competitive in that market and we are not going too far is critical.
Matthew Long: The really important point that we have asked is, “What is the evidence?” In some of these areas through the consultation, we have seen a lack of evidence, but we have seen views. What we want to see are the hard facts and the actual volumetrics that would help us support that decision, particularly around reward. The point of some of the international work is asking those other regulators what they are seeing with their firms, sharing that and bringing it together. That is what we did do through the international work.
It is an important point. It is under review, but, from an international point of view, we are looking for further evidence.
Q183 Lord Lilley: You can only get factual evidence of what is happening elsewhere if elsewhere is ahead of us. Are you happy that we are lagging behind? We are the principal financial centre in the world. We supposedly have vast reserves of expertise in regulation, but we are having to ask about what happens elsewhere and what other regulators think before we develop our own system of regulation.
David Geale: I would reject that characterisation in terms of developing our own system of regulation. We look at the markets as a whole. We look at the markets for other types of payments within the UK. We look at what is happening in other jurisdictions, absolutely. We are designing from the ground up what we think is right for the UK.
The areas that we are designing that regime in are intended to reflect the risks that we see. They are common areas. What do you do around custody? What do you do around accountability? What do you do around the consumer duty? We can look at what we see as the nature of stablecoins relative to those core pillars of what I would consider to be regulation.
We have set out our roadmap. We have had feedback that firms have appreciated that. They have appreciated the engagement that we have gone through towards providing certainty. We will have our regime set and in place by the middle of this year, ahead of the authorisation gateway opening in September, so firms will have clarity. We have an established mechanism for supporting firms through that gateway, including pre-application support, where they can come and talk to us about their applications for free.
When the regime goes live in October next year, under the legislation, we will be ready. I do not see it as particularly any different from any other form of designing a new regime where products innovate and develop.
Lord Lilley: I did not say there was anything wrong with the design. I am saying, “Why hasn’t it been done already?” If it has been done abroad already, why are we behind other people?
David Geale: The US regime has a framework, but it is still developing in terms of the CLARITY Act. Certainly, we have seen MiCA go ahead in Europe. That is true. Under that legislation, the regime switches on in October 2027. We will have our regime ready and in place by the summer.
Lord Lilley: We are about two years behind Europe or longer.
David Geale: We needed that legislation in order to bring our rules into force, but our rules are there and will be ready in line with that.
Matthew Long: Since 2020, any firm in the UK can make an application under the MLRs. We have had quite a lot of applications. We work with those firms that are conducting activity in the UK.
The Government took a sequential position to that, but since then there has been nothing to stop any firm applying for that regime, and indeed many of them have. Some of those that you have heard evidence from have some of the other permissions that sit alongside that. There is a question here about how much of a barrier it is sometimes when we are willing, able and ready to have those applications now.
Lord Lilley: I am sorry, Chair. I have too many questions. Are you saying that people could go ahead now but they are not?
David Geale: They can go ahead under the money laundering regs. The money laundering regulations and the financial promotion regulations are in force currently. The remainder of a regime for stablecoin comes with the legislation next year.
As Matthew says, firms can apply to do stablecoin issuance under those rules now, if they get through money laundering registration. What they do not have is the certainty of a regulation to say, “This is exactly what it looks like”. That is what is coming under our regime in the summer ahead of the switch-on. It is almost here.
Q184 Lord Davies of Brixton: We have talked largely about the system and the way it works, but I assume you are also interested in the physical infrastructure that underpins a payment system and its robustness. Do you feel that there are particular problems with stablecoins? I have seen some suggestions that there are questions about the scalability of blockchain. The whole system relies on blockchain. Is it taken for granted that you can infinitely expand demand on the blockchain system? Does it at some stage start being less efficient?
As an associated point to that, how compatible is the development of blockchain systems, which are highly energy-consumptive, with our commitments to deal with climate change? Are these issues that you have looked at in any detail?
David Geale: What I would reflect is that stablecoin is going to happen. We need to make sure we have the regulation that drives that appropriately. I have not heard particular concerns about the scalability of blockchain. There are new risks that come with stablecoin, which are probably exaggerations of existing risks, such as cyber risks. You have different forms of scams. Somebody could impersonate a wallet or something perhaps to try to steal your keys and then some of the assets would disappear. There are different risks that come with the type of technology that is there. We need to regulate the risk rather than the technology specifically.
We are, of course, alive to sustainability. We have to recognise that stablecoin is going to happen with or without regulation. We need to get that right. It is something that we will have an eye to, but it is not a direct responsibility of the FCA.
Lord Davies of Brixton: Just to follow up, you touched on the issue of payment fraud. On the face of it, it would appear that stablecoin will facilitate payment fraud, in a sense, because once the money is gone, it is gone. It makes it much harder to pursue payments that have been induced fraudulently.
David Geale: I would not say stablecoin itself encourages payment fraud. Through things such as smart contracts, you can have certainty of payment. There are ways of building in fraud protection.
You are right, though: once the money is gone, the money is gone. Dealing with complaints is very important. That is why we have consulted on application to the Financial Ombudsman Service. As you say, once the money is gone, the money is gone. We do not have things such as chargebacks, which you might have with, say, debit cards.
To the extent that this is used as a consumer tool, consumers going into this need to be very clear on the protections that are there and those that are not. We are very alive to that.
Lord Davies of Brixton: You are actively engaged with the ongoing discussions on dealing with payment fraud.
David Geale: Fraud is one of the key aspects of the FCA strategy. We do a huge amount of work on fraud. That is something that we take account of through the work that we are doing on stablecoin.
Matthew Long: At the FCA, we have a team that specifically looks at fraud in crypto. It goes back to what I was saying earlier. If you have a firm that is in the MLRs, it has to be doing know your customer checks. It has to be verifying who those individuals are.
Perhaps helpfully for your question, there is also the travel rule. The firm has to confirm where it is coming from and who it is going to, and to have professional monitoring in place to test that. If there are concerns about fraud, we expect to see suspicious activity reports to us and the National Crime Agency so we can take action as we see fit, look at the themes and respond appropriately to a fraud.
There are an awful lot of things in place, but, ultimately, if you are using a firm that is under the money laundering regulations, you have some comfort that that is taking place. If you are using a firm that is not under those money laundering regulations, I have more concern.
Q185 Lord Turnbull: Can I come back to this question of payment of interest or reward? You said there was not a lot of pressure from stablecoin promoters to pay interest. When acting as a collective cartel, they would say that, would they not? Why would they want to pay more on their liabilities?
At the same time, from talking to the Bank, the same people are saying to the Bank, “You are currently envisaging that 40% of our deposits with you will be unremunerated and 6% will be remunerated”. They are trying to push up the remunerated bit and push down the unremunerated bit. This is cake and eat it, is it not? This does not seem to me to be a stable situation. The promoters can boost the rewards that they make. Because there is a restriction to who they can pay it out to, they pay it to themselves. I am not sure the restriction on paying interest is sustainable.
David Geale: Unfortunately, I am going to say that that is a question for the Bank because it is the Bank’s regime that it is consulting on rather than our rules. I know that it has had the feedback. I know it is under consideration in terms of what the Bank has consulted on. I cannot tell you where the Bank is going to land on it.
Lord Turnbull: Do you have a view on that?
Matthew Long: I have no further view than what David has put forward. It is important in terms of the growth objective that we look at how firms that are regulated in the UK are creating jobs, paying tax, et cetera. That is an important element, but, as David says, it is a matter for the Bank.
Q186 Baroness Bowles of Berkhamsted: I need to follow up on a few of the things that have come out from some of the other questions. The first one that sticks in my mind is that, in our last session with the Minister, she reminded us that our system is that the legislation is made and then it goes to the regulators so that things can evolve and react quickly. I then hear that we are going to have something that starts in October next year. I just do not see anything quick about that. What takes all the time in getting to the point of delivery? That is one question.
Secondly, you just made some comments in terms of safety. I think you were implying that it was a slightly safer system because of the checks at each end as to where the money was going. This was vis-à-vis fraud. Have I understood that correctly?
Some of these things will also feed into the use and competitiveness of the system vis-à-vis other systems, the internal competitiveness of one versus the other. If you are going to take over from payment cards, for example, you could say that the charges on payment cards are a bit of a drag on the economics of the system. It might be good, but are people going to swap to using this if they fear that, if they are on the bad end of a fraud, they will not get any money back? The other systems—where they do not bear the cost; it is borne by the merchants—can lead to them being able to recoup something.
I am afraid that is a little bundle of points, but they are the things that have popped out into my mind from replies so far.
David Geale: Perhaps I will take legislation and touch on cards, and then, Matthew, you can take the travel rule and where we are going.
Currently, as Matthew said, firms can do business under the anti-money laundering regulations. We have power to apply the financial promotions regime. We do not have the powers until the legislation switches on to enhance the regime to bring in the other things that we have consulted on.
To be frank, it is a matter for Government, rather than us, that the actual switch-on date is October next year. We have made sure that our regime will be finalised by the middle of this year so that firms have certainty of what our overall regime looks like for stablecoins in the UK. The authorisation gateway opens in September. They have time to prepare, get ready and get through that authorisation window ready for the full regime to come into place.
I feel we are playing our part. I cannot answer on the date of October 2027, I am afraid, but certainly, in terms of what we are doing, I feel we are giving firms the clarity that they need by the middle of this year, well in advance of our ability to apply those rules.
I would not see this as a replacement for cards. It is healthy for the UK to have what Sarah Breeden at the Bank describes as a multi-money environment. People need choice. We can see that cards work well; we can see that faster payments work well; we can see that BACS, CHAPS and direct debit all work well. Having another choice in the marketplace as a horses for courses element is important.
For business-to-business, wholesale applications and potentially some retail, that gives people an option. It is probably of more interest, to start with, to merchants to offer it because of the impact on cost of doing business and the chance to do things more cheaply than it being of direct interest to consumers demanding stablecoin. That would be my personal view of where we are at the moment.
In order for that to work and to scale, it needs to be trusted and it needs to work well. People need to have a good experience with it. If they do not, it will not scale. That is where the protections come into play in terms of prevention of what I will call adverse payments. Whatever it may be, whether it is fraud or things going wrong in another way, things such as the travel rule become important in doing that.
It is also important that people understand the protection that they get. The protections that they get through faster payments are different from the protections that they get through cards and the protections that they get with cash. It is important that people use things in the right place at the right time. That has to work well in order for it to scale. Matthew, I do not know whether you want to touch on the travel rule.
Matthew Long: In terms of my day-to-day job, the RAO was made in February 2026. We are planning on our entire policy statement being some 20 weeks later.
The feedback that we have had from firms is, “Can you please talk to us about what it is going to look like in between the RAO and the policy statement?”, which is what we have been doing. In that middle bit, we have also, for the whole regime, set up webinars for authorisations, for example. More than 300 firms attended and heard what we were proposing. We got really good feedback about those types of things. We are trying to bridge that gap in the middle in terms of getting ready for the regime. Of course, there are those that are already in the regime. We are working directly with the MLR-registered firms on how to get ready.
In terms of the provisions and the protections, we have put a number of things across the whole of the proposed regime. Specifically, making sure we are one of the world-leading authorities in terms of the travel rule is really important to us. The monitoring that we do as the FCA—we have our own experts, who check the blockchain to see how transactions are being done—as well as checking how firms are doing that and monitoring those that currently have the MLRs, is really important.
If I can give you an example, when I started we were talking about the number of hops, which is how far back in the chain you go to look. We have probably quadrupled how far we are going back on the blockchain since I have been in post alone.
Q187 Lord Eatwell: What I am hearing is that you are making an attempt to facilitate the growth of this market because you are behind innovation and growth, and you are trying to put all your ducks in a row to make that successful.
The question that comes up to me all the time is, “For whom?” The issue seems to be who will benefit from this payment system. Domestically in the UK, we have extremely efficient and mostly free payment systems. That is not credit cards, of course, but BACS, debit transfers and so on are all free. There is no benefit there for the UK consumer. We are then told that this is very good for international transactions, but that is international transactions only in sterling, not FX transactions.
We were told by another witness that the main effect of the growth of US stablecoin has been to give access to the US banking system to people who otherwise did not have it. If the answer to, “For whom?” is people who currently do not have access to the UK banking system, who are they? Are you content that you are building a system for them, particularly when the Bank of England has acknowledged that their KYC, particularly with respect to private wallets, will be non-existent?
David Geale: Let me start and, again, Matthew may wish to add. There are a range of answers to, “For whom?” The opportunities afforded around smart data and programmable contracts in the wholesale space are potentially significant. To take a very straightforward example, you want to buy fuel at a certain cost; you have the money there set aside; it hits a certain cost and it automatically happens—“if this, then that”. Stablecoin could be helpful for businesses in reducing the costs and increasing the speed of doing that.
For merchants, as you say, certain payment types are free. Cash may be free to a consumer, but there is still a cost to businesses of processing cash. Cards may be free to consumers, but there is still a cost to businesses of processing cards. Some of those merchant fees have gone up significantly, in particular since EU withdrawal. Through some of the work that we have done in the Payment Systems Regulator, we have seen that.
We are bringing something into that marketplace that brings an additional competitive pressure. It may well be that people choose to use stablecoin. It may be that the competitive pressure helps to reduce cost in other areas. It is a positive thing.
It is not just about stablecoin. Open banking has a role to play in that as well. We expect open banking to start to scale. We see around 17.5 million users of open banking now in the UK. Variable recurring payments are coming online. It gives people more control and more flexibility.
That was a series of answers. The “for whom?” could be wholesale or retail in terms of merchants. It could be an element that is useful for and interesting to consumers. There is no one single answer.
In terms of people who do not have access to the UK banking system, again, that depends. It depends on who that is. I can entirely answer who that will be. Clearly, it is important that—
Lord Eatwell: You said before that you looked at other people’s experience. Have you looked at the American experience of who has acquired access to the American banking system via stablecoin?
David Geale: Where I was going to go with that was to say that, clearly, we do not want bad actors getting access to the UK banking system. That is where things such as the due diligence that firms carry out and the KYC that we expect them to do are really important.
Unhosted wallets, as you suggested earlier, fall outside our regulation unless they interact with a regulated firm. In that case, the regulated firm is expected to carry out due diligence on who it is dealing with, potentially enhanced due diligence. If there is a suspicion that it may be money laundering or terrorist financing, that steps up a notch again. There is a series of controls around the level of due diligence that they do, the suspicious activity reports that they intend to put into place and so on.
There may be other areas where we do work, such as looking at the provision of basic bank accounts for people who struggle to get into banking but who need methods of payments. I suspect that will be quite small in terms of this.
Lord Eatwell: When you said just now that private wallets fell outside your purview, did you mean that that is where KYC does not work?
David Geale: What I mean is that we do not have sight of that directly. We do not have regulation over that. If those wallets interact with a regulated firm, the regulated firm is expected to do its due diligence and understand who it is dealing with. There are requirements, under the money laundering regulations and indeed our rules, around understanding source of funds, understanding identity, and the travel rule, as Matthew says, play in as well in terms of who the payer and the payee are. That is with regulated firms, not unhosted wallets.
Lord Eatwell: To push this point, those money laundering regulations apply, for example, to cash and so on these days. The scale of money laundering is very considerable. Are we not simply enhancing the potential of that scale by the development of stablecoins?
David Geale: We are not enhancing it. That is why we need a regime in place that puts requirements on firms around the governance and controls that they have and the accountability.
Lord Eatwell: Those are there already and money laundering is rife.
David Geale: Money laundering is a very significant risk in the UK. As both the Minister and Matthew have said, the national risk assessment has put crypto as high. We are aware of that, of course. You have to start somewhere. At the moment, all you have is the money laundering regulations.
What we are talking about here is the opportunity to assess firms at the gateway. We would be able to assess those firms against threshold conditions. We would be able to look at their controls. We would be able to apply our rules to their controls. We would potentially be able to apply the senior managers regime. We have areas such as the consumer duty. There is a whole series of tools that we could apply that are not currently available to us.
I take your point that this is another area of payments and there are areas of it, such as unhosted wallets, that look a bit opaque. At the moment, we have nothing other than the anti-money laundering regs. We are looking to bring in something that strengthens our ability to tackle financial crime alongside the other risks that exist.
Q188 Lord Hollick: I am still worried about the payment that I have just made. If it has gone to the wrong party, or the party I hoped to pay has not received it, how do I get it back?
Matthew Long: If you have made a payment—as you know, the blockchain is immutable—you are not going to get it back. That is particularly why we put into FSMA all the elements about what firms have to do, how they monitor and KYC. If you are sending that payment, you should, if it has gone through a firm, know where you are sending it. That is part of their job in the system.
If you personally send money, as you just described a minute ago, to a self-hosted wallet, it is the same as me giving David £10 now. It is about how much I know David.
Lord Hollick: I know David. I know where he lives.
Matthew Long: Exactly, yes. If you decide, for the sake of argument, to throw it out of the window or drop it to someone you have not met before, that is the risk you take, if you are not going through a firm that has the KYC and is following the travel rule. It is the same as a £10 note. That is the principle that you have here.
There is a bit here about what the role of the regulator is, which is regulating firms and making sure they are doing a good job. We would encourage, as we have consistently, you to use regulated firms, use the firm checker and make sure you know where your money is going. It is the same as many of the online threats that we have seen over the last few years. You do not lose your responsibility to check where you are sending your money and just press go.
Lord Hollick: That is my responsibility. On the other end, what responsibility do they have to cough up if, in fact, they have received it in error?
Matthew Long: At the moment, stablecoins is custody and issuance. As we go forward, the modernising payments regulation, about which you heard from the EST earlier, will look at all of those issues and how far we should go in terms of the various covers that you have for money now. That is not done; that is being worked through now.
Lord Hollick: Looking at the payments markets in the UK, generally, it seems to be pretty efficient. Quite a lot of transfers are made at no cost. If you make it through a credit card, you pay a bit, but you have some protection at the other end.
What is the introduction of a GBP stablecoin going to do to shake the market up to provide a better service than the one that we currently have? The technology behind a digital currency is one that could be adopted by credit cards, for instance. They could set up their own operations. Explain to us what the benefits of introducing this are to the payment system in the UK.
David Geale: First, I would say that it partly comes down to the interface. If you are interfacing through your phone in a retail shop, from a customer perspective, if it is free to use, as a credit card is free to use, the customer will not see much difference. I would start there.
From a merchant’s perspective, it is another option that should be faster in terms of the funds moving across and the liquidity that they have; it is certain for them, in that they have the money; and it is potentially cheaper. As merchants, there is an option and a benefit.
I do expect the card schemes and others to react to that. They should. That is competition. They may well launch their own stablecoins. We have certainly seen interest in that. I would not expect this to be something that just comes in and the rest of the payments market stands still. I expect it to react. That is competition working in practice.
Lord Hollick: You think it will promote some lower costs, speed, accuracy and presumably programmability.
David Geale: Yes, all those things are there. The applications may scale initially in the wholesale markets for those very reasons, rather than retail. I am not sure I see this as a customer demand.
Lord Hollick: Given that there are possibly these goods coming down the track, are you rather disappointed at the pace we are taking to introduce this into the UK and the high barriers to entry that we have been hearing about from witnesses? We heard about the very large deposits that have to be made and the fact that we will not be able to pay any benefit to people who hold stablecoins. We are enthusiastic, but do we have one foot on the brake?
David Geale: First, a lot of the things that we have talked about have been consulted on but not concluded. There is feedback that has come in on all those areas.
Lord Hollick: Is there good news at the end of the consultation?
David Geale: I am not going to be drawn on that because we have not made the decisions yet. Some of those decisions are for the Bank of England.
Lord Hollick: Do you recognise that there have to be some changes if we are going to encourage people to come into this market?
David Geale: We recognise that that has been said as feedback. There will be areas where we may agree and there will be areas where we may disagree with that feedback because we think it is important to maintain the position that we have set for the protection of UK consumers and the UK market.
The purpose of consultation is to learn about what works and what does not, and to make sure that you calibrate the final rules appropriately. That is what we have done and what we will do.
Q189 Lord Sharkey: I would like to ask about the sandbox. Just before I do that, I have a remark about protecting consumers in the event of mistake in a transaction. We have been told that under certain circumstances it is possible to authorise a freeze on a blockchain transaction. Is that true? If it is true, who has that authority? I will then talk about the sandbox.
Matthew Long: Yes. To elaborate on the last three questions, one of the actual positives in terms of fighting financial crime with the blockchain is that you have a wallet. You do not know, unless you have done the right checks as the firm through KYC, but you do have a wallet.
Practically, that means we can identify a sanctioned entity. We can sanction that and make it prohibitive or difficult. For example, we could ask our colleagues at the National Crime Agency or elsewhere to take action and investigate that wallet. We are now getting a list, for want of a better word, of the bad actors that we can work against, which is a positive.
In terms of whether you can turn a stablecoin on or off, it depends on the issuer of the stablecoin. We are very passionate about is making sure that we use technology for good to deal with some of these bad things that we are seeing. Certainly, the FCA is encouraging any such proposal, sandbox or otherwise. One of the things that we are discussing in the sandbox is, “What opportunities does this technology give us to counter organised crime groups and criminals across the UK?” We are supporting that; we are actively asking those questions.
Lord Sharkey: I am not entirely sure that answers the question about who can freeze a blockchain transaction.
Matthew Long: Most likely, it is the issuer. We do not have that case right now in the UK. It is most likely the issuer, but that does not mean we will not explore, as we go into the next couple of years, whether there is something else that others could do on those payments.
The proceeds of crime powers still exist. You would need to prove the crime, which would be a matter for the National Crime Agency, but we have some powers there as well.
Lord Sharkey: Let me ask about the sandbox. ReStabilise is a white-label platform and a member of the sandbox. Its proposition is not to issue its own stablecoin but to allow traditional financial institutions to issue branded stablecoins under the white-label tradition. Is this for only financial institutions? Could other large-scale institutions, through ReStabilise, issue their own brand of stablecoin? Would this lead to a proliferation of brands? Is that a problem? If there is a proliferation of brands, how do they compete against each other?
Matthew Long: That is a really good question. The answer to the second part is that there is a little bit of, “Let the market decide” here. We have heard about the nascent element and we are now building the sandboxes to give some really good opportunities across wholesale, issuance and banks that are currently considering having a subsidiary that would drive it forward.
In terms of ReStabilise, it is a UK-based business. Its initial product is a proprietary GBP denomination, as you say. We are testing that with it live in the policy sandbox now. The question that you have just asked is the exact policy question that we are working through with ReStabilise so that we get a good answer in the next month in readiness for the gateway.
Lord Sharkey: This also builds into the problem underpinning a decision on rewards. It is not clear how these various white-label brands will compete with each other unless they are allowed some kind of flexibility. Presumably, in your investigation of likely rewards, you are taking into account the fact that the market will probably develop these and it will cause not destabilisation but real competition in the marketplace. I am not arguing that that is a bad thing, but it is a complicated thing.
David Geale: As Matthew says, it is a good question. Part of the benefit of the sandbox is that it gives us the opportunity to look at and think about things like this. I would suggest that you might not have too many concerns about a white-labelled stablecoin from a large supermarket, for example, which you know and trust, but there might be something else that you would have concerns about. What requirements would we want to put in place about clarity and look-through, for example?
These are open questions rather than something that we can answer now. That is exactly the sort of thing that the sandbox gives us the opportunity to test.
Lord Sharkey: We would be anxious to hear from you the moment you decide on how to deal with this.
The Chair: Thank you very much, both of you, for coming to give evidence this morning in our final evidence session. We are very grateful to you for the time that you have given us. Thank you very much.
