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Welcome to The Payment Expert weekly podcast, brought to you by SBC Media. Each week we analyse the news driving the global payments industry forward; the innovation, the infrastructure, and everything that has to happen to make it all possible.
Callum Williams (00:02.87)
Welcome back to the Payment Expert podcast, your source for the latest news, insights and analysis on the payments industry. I'm Callum Williams, senior business journalist for Payment Expert, filling in for our regular host, Louis Tomsett this week. I'm delighted to be joined by Keith Bear, an associate partner at Alixir, as well as a fellow at Cambridge University's Centre for Alternative Finance. Keith joins us today to discuss the ever evolving digital economy, which now encompasses digital payments, currencies,
and rails as companies and regulators begin to untangle these components for best practice. Keefe, thank you so much for joining us this week. Firstly, how are you doing?
Keith (00:43.394)
Well, thank you for the invitation first of all and I'm considering the weather, I'm doing pretty good I think.
Callum Williams (00:48.972)
Yes, I know we're experiencing our second heatwave this summer in the UK. yeah. Yeah. So many heat waves, if lost count. No, but yeah, thank you, Keith, for joining us. And just to kick things off with the US and the UK, they're both leading into this competitive phase at the moment when it revolves around the digital economy like I mentioned at the intro. Enforcement keeps on coming.
Keith (00:54.66)
I think actually, but yeah, a lot.
Callum Williams (01:17.304)
but are banks investing in payments any differently on both sides of the Atlantic?
Keith (01:22.946)
Yes, I think they are. I the situation is a bit different on both sides. So in the US obviously it's fundamentally changed as a result of the genius act being passed. That has opened up the whole question of stablecoins and we're seeing a huge amount of innovation in that kind of context. Notably in the, I was on a panel at EY on a payments conference this morning.
and we had Visa speaking about OpenUSD, is the 140 firms including over 30 banks, technology companies like IBM and Samsung and other firms like Coinbase, all behind a very democratized version of issuing a stablecoin. So that's just the latest development that's happened over the last week, which just illustrates, I think, the pace of change going on in the US. Things are a bit different, I think, in the UK. Obviously, we've gone through a significant amount of consultation
the Bank of England, FCA, etc. in terms of what the shape and form of stablecoin regulation is likely to be. And to give due credit to the Bank of England, they've listened, I think, very well. I've been involved in two of the consultation processes in terms of giving input on systemic stablecoins. And the bank's position has shifted remarkably, I think, from having limits, £20,000 limits on stablecoin holdings for retail consumers to just limiting at the issuance level.
so £40 billion worth being the kind of cap for now at least. So that gives a lot more clarity and transparency and whilst those regulations aren't in force yet, they will I think give a lot of encouragement to firms to now understand what the regulations are going to be and to start investing in building the kind of capabilities. How that pans out in practice is going to be really interesting I think.
Callum Williams (03:09.728)
Yeah, especially when it pertains to the transparency within the regulations. Obviously, we've seen that in the US with the Genius Act and the incoming regulated market for the UK is coming in October 2027. I just wanted to get your thoughts, on some of your banking clients. What are they saying at the moment regarding stable coins? Are they currently watching from the sidelines and are they kind of almost waiting for this consumer adoption breakthrough or even just a breakthrough in merchant acceptance?
Keith (03:15.819)
Exactly.
Keith (03:36.458)
I think it varies according to which country we're looking at. So in the US, there's still a certain amount of confusion or lack of alignment maybe in terms of the Clarity Act, really between the question of whether stable coins...
can play pay remuneration through rewards and other incentives that have been the case up to now, which the banks see as an unfair playing field, given what happens with checking or current accounts in the US versus firms like Coinbase, who are very aggressively in the opposite position because that's a fundamental part of their business model. So when the Clarity Act actually is clear, I think we'll be in a much better position of understanding how that's going to develop and what position the banks take.
because at the moment, whilst as I said there are 30 banks being part of the OpenUSD initiative on the stablecoin side, there's also a significant number of big banks that are participating in the clearing houses tokenised deposit network as well. Compare over to the UK, the situation is quite different as I mentioned before the regulatory environment is becoming clear but it's not yet in place. But seven of the major UK banks including Lloyds, NatWest, HSBC, Barclays, Nimonzo as well
So seven banks in total have joined the GBTD, the Great Britain Tokenized Deposit Network, which is using tokenized deposits as opposed to stablecoins. So basically tokenizing bank deposits for three use cases, one on remortgaging, a second on locking funds for peer-to-peer marketplaces, and a third around digital bond settlement. So that's an example of significant investment going in and coordination at the industry level for a tokenized deposit network. So there I think it's question
and more of we don't have any UK banks, as far as I'm aware, actively considering issuing stable coins, but they may well be providing on and off ramps, which is a less confrontational, less significant approach, maybe as far as stable coins are concerned, depending on the demand they see from their customer base. But quite different, I think, this balance between tokenized deposits and stable coins that we're seeing on both sides of the Atlantic.
Callum Williams (05:30.488)
Yeah.
Callum Williams (05:47.277)
Yeah, particularly in the UK, I think there's not been, I'd probably say, a strong appetite for banks to issue their own type of stablecoins. They've obviously gone more in the tokenized deposit realm. Obviously, you've seen Lloyds at the start of the year test their first live tokenized deposit settlement. I do know that one company, Revolut, are kind of interested in issuing their own sterling back stablecoin. I just wanted to get your thoughts, Keef, on would some of the, so would the incoming UK,
regulatory framework for the adoption of stablecoins, would that enable some banks and even some fintechs like Revolut to issue their own stablecoins and is there any potential for big tech companies like Meta who have reportedly interested in launching their own stablecoin?
Keith (06:31.998)
Yeah, I think the it's an interesting question, obviously, because Metta obviously were behind the Libra original development, which caused a huge amount of regulatory upheaval and industry focus as far as this whole question is concerned. know, Revolut, as you say, is an example of a UK bank that may well issue a stablecoin. I think that'll be really interesting to see if and how that happens in that regard, especially given the position that the as I said, the other UK banks
Callum Williams (06:37.858)
Yeah.
Keith (07:01.922)
have, which is much more geared towards tokenized deposits. And it's interesting, you know, with the seven banks that are part of GPTD, that includes Monzo, but it doesn't include Revolut, probably, possibly for the reasons you say. So I think the regulations give a clear roadmap as to how this can be achieved. The big question, I think, is whether such stable coins will become systemic or not. If they're systemic, then the regulation falls to the Bank of England, rather than the FCA.
the 40 billion pound at issuance cap comes into play. So the question I think is given the scale of Revolut's business in the UK or the scale of Metta's business in the UK, will they stay below that cap, not be systemic and therefore be compliant with the FCA's regulations which you know come into force in October time next year.
or will they become systemic because of the size of those businesses, in which case there's a question in terms of what that tipping point is to become systemic or not, not necessarily fully defined by the Treasury yet, but then what the implications might be as far as that cap. Will it be big enough to sustain business models or will it be hit by some of these larger institutions?
Callum Williams (08:16.14)
Yeah, and there's also the incentives, right, of what are the incentives for a bank or a fintech issue there on stablecoin. Obviously, there's been the whole issue regarding around stablecoin yield within the clarity act over in the US. And then obviously with the new proposals coming out from the Bank of England and the Financial Conduct Authority was that there may not be as much interest bearing yield for a potential sterling back stablecoin. I just wanted to gather your thoughts on whether that's something you're hearing from some of your clients or the industry.
whether some of the UK banks and fintechs are actually pushing for.
Keith (08:50.814)
in terms of remuneration. think there's at least as far as the UK is concerned, there's general acceptance that there won't be remuneration and the adoption will really be driven I think by the utility of the use cases that get developed. and that because we already have a very efficient domestic payment system for years, faster payments, et cetera, the focus may well be on international cross-border payments in that respect. But I think it depends
Callum Williams (08:52.248)
Yes.
Keith (09:20.738)
depends on the applications that get delivered by banks in terms of how innovative they are and what kind of new functions and features can be made available and what client demand, customer demand there may be for those features that will really dictate what the shape of that evolution is going to be.
Callum Williams (09:36.943)
Yeah, and there's still time to tell and obviously stablecoins are still in their infancy but one digital payment that is not in its infancy, it's actually come in quite the predominant payment methods, obviously digital wallets, your Apple pays, your Google pays, Paypal as well. With all these digital wallets now, Keev, is there a fragmentation issue that could start to arise and is that something that banks should start consolidating or just learn to live with?
Keith (10:04.0)
Well, it's an interesting question, think, because as you say, a large proportion of payments go through Apple Pay or the Android equivalent in that respect. And that still may go on traditional rails behind the wallet in that context. But as part of GPTD, which is, as said, seven of the UK banks investing in that, they have to provide wallets to hold the deposit tokens and build applications that provide the functionality for those first three applications.
mentioned and presumably other applications that will be layered on top of the network next year or the year after in that respect. So you you will end up with a UK bank application which may have a wallet for tokenized deposits. You may also have an Apple wallet on your phone for instance if you're an Apple customer. So I think it's an interesting question in terms of is that going to be too clunky an experience in that respect. Will that have an impact in terms of how one or other of the
applications actually functioned in a
depending on whether we're talking at merchant payments or person to person payments, et cetera, and whether we'll see these two kind of wallet propositions integrating in some environment. Because at the moment, they're quite different technologies. know, the Lloyds, Barclays, and HSBCs of the world are building digital asset wallets as opposed to the existing wallet infrastructures that exist with Apple and others. So will we see that bifurcation continue, or will there be some level of integration and abstraction from that adjusted?
in terms of providing a better, more integrated consumer experience.
Callum Williams (11:41.121)
Yeah, and I think what also has been going about now in the UK especially is the kind of almost the reliance on these debit cards and credit cards are attached to the digital wallets when it pertains to Visa and MasterCards kind of do-oply around the network. And what's being proposed now is more a focus on A2A, account to account payments and payment rails. And one being paid by bank. Keefe, is there any boundaries at the moment when it pertains to the adoption of paid by bank?
for the merchants, not just in the UK but also in the US.
Keith (12:16.767)
Well certainly as far as the UK is concerned, mean obviously the existing rails via cards have the facilities for chargebacks section 75 in terms of being able to take responsibility for that kind of environment.
and that's accepted by the banks and also the question of rewards that flow through the credit card companies as well. And pay by bank obviously doesn't have those kind of features and functions directly once the payment is made, the payment is made in that respect. So I think there's going to be an adoption bridge that needs to be crossed in terms of broader consumer adoption. And we're likely to see, think, as we're doing already, think pay by bank happening with recurring bill payments,
that you're using your laptop or your phone to do all the time and it becomes an easier experience.
to do that as opposed to retail stores, the point of sale, where it's more likely for some time to stay in the card company remit rather than going through pay by bank until such time as we either have a CBDC, which we haven't talked about, but obviously in the EU, that's the eurozone. That's the thing that's likely to happen in that respect. you know, being able to pay with digital euro at the point of sale will become a thing probably. But, you know, we haven't
reach that point in the UK yet but it will be increasingly the case that stable coins will become...
Keith (13:45.748)
more prominent means being able to make payments alongside the traditional pay by bank and the credit card rail alternatives. And that's why, of course, we're seeing Visa and MasterCard in particular making significant investments and other merchant acquiring software providers and service providers to provide stable coins in order to be able to have merchants receive the payment instantaneously as opposed to waiting a day or two and also at a lower fee structure than is charged through interchange at the moment.
So there is, to answer your question, I think you have to look at pay by bank versus what's happening on the traditional cards, what's happening with stable coins, and each will find its place according to where the least friction and the greatest consumer experience is going to be.
Callum Williams (14:30.006)
Yeah, I even forgot about CBDCs and obviously you mentioned the digital euro there. obviously tokenized deposits, stablecoins, we're kind of just living in this digital currency world at the moment with no watch. Yeah, it's all very exciting, no through penetration yet, I would say. it's just sticking with A2A at the moment, Keith.
Keith (14:39.625)
we are, it's a great area for research, as you can imagine.
Callum Williams (14:51.426)
Obviously they bypass the card networks like Visa and MasterCard and obviously now it's beginning to grow in Europe. know you have localised payment methods like Blick in Poland, BISM in Spain, and now obviously Wero which is obviously trying to be propositioned as the true replacement to Visa and MasterCard, obviously active in countries like France and Netherlands and Belgium. Do you reckon the card networks are viewing this A2A movement in Europe as a real threat and is this type of threat?
looking to cross over the Atlantic and the US.
Keith (15:24.516)
I think it is a threat in some respects though, I think from the...
companies point of view they have some level of acceptance about it. I mean one of the most striking examples of what you're describing I think is PICS in Brazil where something like 47 % of payments now go through PICS versus 22 % that are made in cash, 17 % in debit cards and 12 % in credit cards. So that's obviously had a significant impact in the traditional credit card business and actually shows what you can achieve if you take the approach that Brazil took where there's a central bank mandate
in the first place, standardizing in terms of the user experience and also making the platform free in that respect. you know, taking those three things together can make a significant change. So I think the card companies are right to consider the risks of these kinds of approaches. And then if you layer on top of that what we just talked about in terms of tokenized deposits and stable coins, you know, that creates new risks and threats and opportunities as well.
understand how that miasma, different payment mechanisms will actually find its way. As I said, I think it comes back to the decisions that are made. Are we going to see a much more significant regulatory position as Brazil's central bank has taken? And to be fair, what the UK did with the CMA and Open Banking, for instance, where there was strong requirement to provide those functions and features, a mandate on the banks themselves to deliver that, which can provide significant adoption as a result.
Or are we going to be in a more democratised open market and the market will decide what is most successful? And you mentioned the US, obviously I think there's going to be some time before, several years before we see significant A2A count to account.
Keith (17:16.233)
payment volume compared to what we've seen in Brazil and what we're likely to see as far as Europe and the UK are concerned. WIRO is really interesting, I think, because obviously that and also the digital euro we touched on also touch on another factor, which is the digital sovereignty. Because one of the common cries you hear from the European Central Bank is the dependence on US payment card networks and the need to have a sovereign alternative, which is what the digital euro and also WIRO.
Callum Williams (17:39.502)
Hmm.
Keith (17:46.177)
are providing. So how those two will end up competing with the Javva as far as consumer attention is concerned I think it will be also an interesting dynamic.
Callum Williams (17:55.373)
Yeah, I know the private European market has obviously been trying to question the validity of the digital superhero as well at this junction. Well, well, Keith, I think just kind of almost taking a step back and obviously, obviously we've talked about so many digital innovations that happening right now. Just taping one step back and just kind of almost creating this picture of how this is all interoperable with one another. What is...
Keith (18:03.774)
It's not in their interest, of course, so yeah.
Callum Williams (18:24.386)
what is the best practice you would say for the UK specifically? mean, we could talk about other countries like the US and Brazil for ages, just in the UK specifically, what would the ideal interoperable image be in terms of accommodating stable coins, tokenized deposits, a CBDC, et cetera, et cetera?
Keith (18:44.376)
That's a good question and one that comes up all the time, think, because we're seeing so much development and innovation taking place, there is real risks of fragmentation. So, for example, we talked about GPTT, but that's a UK initiative. talking about...
Open USD, which is great as a stablecoin and so-called USDC, etc. But they run on multiple different blockchain rails, so we have fragmentation at a kind of underlying blockchain infrastructure kind of context. So that all leads to a kind of balance between the kind of risk of fragmentation and the drive that that creates for greater and greater interoperability. So obviously from the central bank point of view, be it the Bank of England, ECB, the Fed, they want to underpin everything with central bank
money as the foundational layer for the financial system to provide stability, allow the central bank to do its job as far as that's concerned. And tokenized deposits have a needier path to play because they're still within the conventional fractional banking reserve system as opposed to stable coins, which obviously are one-to-one banked with risks associated with the reserves, the liquidity, the counterparty exposure to the issuer, et cetera. So there are significant challenges, I think,
as that goes in that respect.
Callum Williams (20:06.542)
Yeah, you've done your best there to try and collate all these digital innovations together and obviously we're years away of regulators and even companies just figuring out themselves how this all pans out. So yeah, it's obviously something to look forward to in the future. Well, lastly, Keith, thank you so much for your time. We really appreciate it. Just across all your clients, you don't have to name them by the way, I don't want to put that burden on you, but across all your clients that you've heard on about all these digital innovations over the past year.
Keith (20:21.093)
Exactly.
Callum Williams (20:36.686)
What have they said are kind of like the most overhyped digital payment innovation or method?
Keith (20:43.685)
I think...
Overhyped to some extent because of the efficiencies of domestic payment mechanisms and platforms. Stablecoin payments domestically is probably somewhat overhyped. Obviously stablecoins have grown significantly on the back of crypto on and off ramps. They have great opportunities in terms of efficiency, latency, cost for payments, but we already have efficient domestic payments. I think domestic payments are overhyped to some extent, but the underhyping, the underrating, so we're working with a
at the moment within the African continent that is looking to understand how they could play a leading role using stable coins to provide support obviously their continental ambitions as far as Africa is concerned but being able to provide significant payment innovation across the whole of the continent. So when you're talking about different jurisdictions, different regulatory environments, different fiat currencies, understanding how that
efficiency can be generated and how that implicit friction can be abstracted away as a result of what stable coins or other forms of digital money can do. It really illustrates significant growth and potential business benefits for banks that take that kind continental view as opposed to domestic view. So the underrated piece I think is very much that overall perspective as to how this can actually join up different jurisdictions, provide greater payment
efficiencies and really help the economies of all those countries concerned by being able to reduce cost and increase efficiency of payments. Obviously that's a huge burden otherwise as opposed to the domestic side which is already pretty efficient.
Callum Williams (22:30.83)
And we'll obviously continue to see how this progresses and grows and what the amount of use cases that come with stablecoins, not just stablecoins, A2A payments and et cetera, et cetera. that's all we have time today. Thank you again, Keith, for joining me. And if you are not already subscribed to the Payment Expert podcast, make sure to subscribe wherever you get your podcasts with plenty more insights and analysis coming over the weeks and months ahead. And for the latest news as it happens, head over to paymentexpert.com. We'll see you in the next one.