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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.
Louis (00:01.18)
Hello and welcome back to the Payment Expert podcast, your source for the latest news, insights and analysis on the payments industry. I'm Lewis Thompson, news editor at Payment Expert and with me today is senior business journalist, Callum Williams. Callum, thanks for joining me again today to talk all things digital payments lab or the digital payments lab phase two.
Callum Williams (00:26.466)
Yeah, cheers Lewis, thanks for having me on again. Yeah, it was quite a busy week for the UK crypto scene in particular. know there's Robinhood launching their crypto services. There's obviously more talks around regulation and obviously now with the digital Pound Lab, they're moving onto phase two with this as well. yeah, looking forward to it.
Louis (00:36.935)
Yeah.
Louis (00:45.478)
Yeah, yeah, I feel like I've missed about I've been off for a week. So it feels like I've missed a lot of things. But let's talk about the digital pan pound lab. It's been running a while, but this is the first time that it's tested. You know, stable coin and digital pound settling within the same payment. That's quite a new, I guess.
innovative test. Why do you think that's something the bank really, you know, are looking to do right now?
Callum Williams (01:18.38)
Yeah, but we'll...
So a CBDC and a stablecoin payment rail or parallel payment rails is something that has not really been explored by a country of the size of the UK. You know, we've looked at China prioritizing their CBDC, the digital one, over stablecoins and crypto, even going as far as banning them outright. And then on the flip side, you have over in the US, they've actually put out a legislative ban on a ever developed of the federal reserve ever developing a CBDC and obviously now prioritizing
Louis (01:34.769)
Yeah.
Callum Williams (01:49.275)
and stable coins under the Genius Act. So I think this has opened a unique lane for the UK just to differentiate itself from those markets and other markets that have swayed one way to the CBDCs or swayed another way to the stable coins. They're actively looking at embedding both digital currencies within their regulatory framework and obviously also maybe their capital markets to exist cohesively with one another. And this also just ensures flexibility for
Louis (02:16.016)
Yeah.
Callum Williams (02:19.098)
would be investors, businesses and customers alike.
Louis (02:23.075)
Yeah, sure. mean, it's interesting as well that it comes after the Bank of England in June announced their stablecoin rulebook. And one of the big themes of that was getting, you know, generating more interoperability between the realms. So they're sticking to the promise in that sense. Obviously it is, you know, they call it a pound lab. It's I guess a kin or parallel to a
a sound box, so there's no real live rails, no real money in play at the minute, is there? I guess for firms in the space, it's, I guess, seeing how it works and for those involved, getting a sense of how it could be applied without obviously going in and having to build it all independently themselves.
Callum Williams (03:11.15)
Yeah, I mean, there's zero live risk when it comes to obviously with digital sandboxes and testing some new payment innovations and whether that be apps, updates, even payment rails in themselves. There's no real money being at play here. It's all simulated. It's all trial and error, testing complete. Synthetic and anonymized data is also being used as well, also within the same regulatory environment that it would be, say, if it were to come into effect.
Louis (03:16.325)
Yeah.
Callum Williams (03:41.057)
down the line so I think it just creates an easy controlled environment for would-be companies like Polygon Labs who's now part of the Digital Pound lab phase two or a Noble Finance it just gives them ease of mind knowing that this is all just test and trial and error and yeah it's something that they can just work alongside with one another and test what is the best use cases and best practices for taking this forward.
Louis (03:51.365)
Yeah.
Louis (04:08.835)
Yeah, sure. You mentioned Polygon, which is quite interesting. I know Phase One had Noble involved and they did a lot of the kind of conditional escrow work with that. Obviously Dunham Bradstreet are there as well with their data. Polygon is quite interesting though, because they're obviously a public chain, but they're US based and they're sitting within the UK's Bank of England project. Does that suggest something about, you know,
I guess collaboration, obviously the Bank of England can't obviously do something completely in-house on their own and needing to rely on those external infrastructure providers to offer that kind of support.
Callum Williams (04:53.216)
Well, unfortunately for the UK, they've kind of been digging their heels in the whole crypto and digital asset landscape at the moment. So they've kind of almost got to go to the key leaders and key players. And that would be obviously someone like a Polygon who have really been delved into more of the global on-chain money movement over the past several months. I know their Open Money Stack, which they launched last January, is part of the digital Pound Lab phase two approaching and just bridged
Louis (04:59.919)
Yeah.
Callum Williams (05:23.12)
some of these payment rails, traditional banking rails, for instance, like I know they've already worked with ACH over in the US, the SWIFT network as well. They're looking to bridge those traditional banking rails to digital asset rails for just seamless for you to crypto conversion and stable coin conversion. They also embed their own like custodial wallets that just to hide the complex blockchain nature when it comes to processing these payments on
chain and then also includes like KYC hubs compliance tracking as well just to ensure that that underlayer is protected as well with all the sufficient and compliance guidelines and make sure it's just being compliant overall so no Polygon have definitely been ramping up their efforts in the amount of traditional currencies and digital currencies it's been supported and facilitating with some of these transactions that have obviously just exploded over the past year or so I'd guess in B2B payments.
Louis (06:20.462)
Yeah, I mean, it makes sense with their track record when it comes to, guess, like USD in stable coins, they've settled, you know, trillions in that. I guess, like, I suppose it kind of suggests the production grade, though, obviously, where Polygon sits in the US and how maybe advanced the US are when it comes to those, I guess, production grade ready rails that they have in place. Maybe a signal that, you know, obviously the US being
leader in a market, but also I guess the bank kind of recognizing that they are a leader, therefore relying on them and I guess understanding where the UK sits in comparison a little bit.
Callum Williams (07:02.796)
Yeah, it goes back to obviously the UK being so...
in and out when it pertains to crypto and digital asset regulation that there hasn't been confidence from the market to say, why don't we have the UK's own polygon? Do you know what I mean? Or maybe some UK specific based crypto exchanges, like most of them now are obviously based in the US or some of the offshore countries, but the Middle East as well. Like there's not many that are calling the UK home. I think, and to be honest, for good reason, because we are many different prime ministers, many different administrations.
Louis (07:10.735)
Yeah.
Louis (07:18.288)
Yeah.
Callum Williams (07:37.537)
but none of them have had the same through line when it pertains to getting crypto and digital assets regulated. And obviously now that's coming in October of next year, October, 2027, but, and while they are making moves like the digital pound lab as well, I just think it's, it's kind of, they've got a lot of making up to do pretty much. And I think maybe this will help breed some new, some new crypto players that are based in call the UK home.
Louis (08:04.654)
Yeah, definitely. Yeah, I think that sentiment's probably echoed for many that operate within the space in the UK. Another part of the lab is there's an SME bankable profile, which maybe has not had as much attention as obviously the main settlement piece, which kind of includes a portable, usable credit identity as well. I suppose a big question around that is who ends up...
I guess owning and controlling that profile, does it sit with the business, the lender or the data provider? Obviously they all work together. But I guess a question of ownership around that is gonna be an important thing going forward.
Callum Williams (08:47.798)
Yeah, and I think a lot of open finance data as well is going to be quite essential to this SME bankable profile. Obviously, when it comes to collecting data, especially across potential blockchain payment rails, that becomes key just because it gives you the whole visibility of the payment transaction and the payment journey as well. There's obviously going to be some wallet transaction signals embedded in there as well. Maybe some commercial credit scores as well into that single profile. So it will allow businesses to gain a better understanding
of who the customer is, why they're paying, maybe who they are, what they're paying for. Just gives greater insight into the whole customer and being able to understand the customer as well. I think it just allows small businesses then, therefore, to understand who the customer is and then they can also keep them on as a potential retainable customer throughout their life cycle as well. But I think it's just being able to just reduce friction and
Louis (09:46.563)
Yeah.
Callum Williams (09:47.585)
And yeah, just stopping delays and just speeding up the process. And I think that's why you're seeing the digital Pound Lab now and why so many companies and businesses are trying to get into blockchain and on-chain finances because it just massively speeds up so many manual processes and even digital payment modern processes that typically take a couple of business days to seconds and nearly instant. So, yeah.
Louis (10:13.614)
Yeah, I suppose the kind of data portability allows those firms to do that, potentially in the future. If you look at, guess, the factoring flow where the exporters can draw the stable coins in advance and the imports can basically settle later in digital pounds when, I guess, across those two methods of...
of payment. I suppose that raises another question around the kind of ownership of the FX and the risk, the kind of counterparty risks. Where does that sit when you've got one leg that's a private token on like a stable coin and the other is like a central bank money? There's the question of who owns the risk between those two.
Callum Williams (10:46.03)
.
Callum Williams (11:02.838)
Yeah, it's definitely an interesting factor to raise when it pertains to some of the effects and counterparty risk involved in some of these transactions. do. It's something that's been echoed quite rightly when it pertains to like tokenized commercial bank deposits. And I think that's why you're seeing so many banks opting for tokenized bank deposits as opposed to adopting private stable coins because they don't really have control of the stable coins. And I think with tokenized deposits,
Louis (11:09.721)
Yeah.
Louis (11:19.216)
Mmm.
Callum Williams (11:32.067)
they sit under the same banking infrastructure as you would a Fiat or just normal commercial bank deposit. And I think...
It just offers that same type of reliability and speed as it would transacting with a, let's say a digital sterling or a digital pound, for instance. You can still get that same type of speed, cost effectiveness with a tokenized bank deposit as you would with a stable coin or a CBDC. So, and that type of regulatory layer as well that's protected by them is something why you have now Lloyd's going and who I think they've completed the second phase of
tokenized deposit pilot and they've got the US banks like Citi and JP Morgan Bank of America going so in on tokenized deposits they see them as risk risk averse should we say they see them so much more risk averse while still offering the same benefits and speed and cost effectiveness as you would a stablecoin or a CBDC etc etc
Louis (12:23.414)
Yeah, sure.
Louis (12:33.291)
Yeah, I mean, another, yeah, that's very true. mean, another point that's interesting is obviously they, the two legs of the payment. So going from, you know, stable coin to CBDC, it kind of settles within the same flow without one side waiting. So settling on one side and then kind of sending back and settling.
on the other side. I guess that you could argue that we're in the realm of now atomic settlement where things happen very quick. Or do you think there maybe is a trust assumption in the middle? guess everyone within the sound box has agreed to it. So therefore they have that trust between them. But yeah, I suppose if it were moved out to the wider market, is there still a...
a trust angle. know Polygon have said, you know, they've kind of framed it that the two can settle the same cross border payment in the same flow without either side waiting on the other. But obviously that implies a lot of coordination in that. So is that really kind of atomic settlement as it was kind of been promised or is it just a real hyper coordinated form of payment between the two?
Callum Williams (13:50.19)
Someone's walking in. Yeah, just give us one minute.
Louis (13:55.886)
Yeah.
Callum Williams (14:16.694)
Right, sorry. What was the, do we it and probably start that again, I think. Yeah.
Louis (14:21.241)
So I'll do the question again. Yeah. Yeah. So another interesting point is obviously that, you know, the, the, you know, the two legs, the CBDC angle and the stable coin angle, can settle in the same payment flow without either side waiting. Is that really what, you know, atomic settlement is obviously, you know, that that's what's been touted for, for a long time, you know, across stable coin and CBDCs, or is there still
a bridge and a trust assumption in the middle, Polygon have framed it as the two can settle the same cross border payment in the same flow without either side waiting.
on the other, a lot of it implies trust within that. So do you think that really is atomic settlement or do you think atomic settlement will essentially be based upon that, know, broader wider trust going forward?
Callum Williams (15:21.048)
Yeah, think, think atomic settlement obviously is just kind of the removal of those intermediaries, right? When it pertains to the, the life cycle of a, of an unchained finance payment, whether it's using blockchain or distributed ledger technology. I know that JP Morgan's JPM coin, which is kind of like their dedicated digital asset for a tokenized bank deposits. They've been testing atomic settlement.
for quite a while now using that specific digital asset.
to enact the settlement. I know that smart contracts usually act as automated escrow agents when it pertains to the conversions and the settlement of the actual payment when it comes to using some of these blockchain rails and distributed ledger technology rails. But I think what the Digital Power Lab is maybe trying to use as a case studies is what happens is when
Louis (16:08.91)
Yeah.
Callum Williams (16:20.948)
maybe a stable corner, a digital pound, if that transaction just falls out of the loop or potentially it fails and then who is then the middle?
the middle man should we say, the intermediary who then picks that up and fixes that and tells the sender of the SIBO who's gone wrong. It's obviously quite a few questions that will need answering but I'm sure that all parties involved will be trying to solve that out I guess. Maybe not me.
Louis (16:50.071)
Yes, yeah sure. Yeah, I suppose it is a case of, I mean, it seems to be more of a case, doesn't it, that the problem has been perhaps the workflows and the data are unconnecting rather than the payments being slow. So by, guess, going to the source and connecting those data points when you look at things like.
electronic bills, for example, for businesses, it's the connection of those points rather than the actual payment being slow. So, you know, this could help, I guess, across businesses when it comes to that.
Callum Williams (17:23.118)
Yeah, it definitely, it's an interesting time because you've got so many pilots kind of doing the same thing at the moment with so many different currencies. It's kind of like, well, who's doing what, who's doing what with this smart contracts, who's using their currencies for different tokenized deposits or CBDCs or stable coins. It's so, I think then that's why the UK kind of want to test the CBDCs and the stable coins together is like this interoperable kind of parallel chains like
Louis (17:30.19)
Yeah.
Callum Williams (17:53.055)
they coexist and if they can coexist together then have we got a leg up in the in the digital currency race to other countries but yeah that's a topic for another day I guess.
Louis (18:01.078)
Yeah. Yeah. Well, and I suppose if you look at like stable coins and digital pounds together in the same flow, and obviously that they're interoperating together, do you think it's kind of an admission that maybe stable coins, you know, have won the kind of near term use case or, you know, are more popular and maybe the digital pound is much longer away and by kind of bringing them
together it kind of still establishes the kind of digital pounds or digital currencies in general as a more of a future adoption, but by kind of, you know, pairing them with stable coins in the first place.
Callum Williams (18:41.834)
Yeah, I think...
So we read that we had this conversation before, we, about stable coins and if they're leading the race and stuff like that. And obviously with the events we've been through last year, there's a lot of everyone's speaking about, but I think we're also missing that consumer aspect point. I know they're being used right now widely for B2B payments and cross border remittances and instant settlements. And while that's all good, there's still that consumer aspect that's just not been hit yet. I think when you look, like we said, it pertains to the banks, think that tokenized deposit angle
Louis (18:48.962)
here.
Callum Williams (19:13.216)
is one that's going to keep on increasing when more more banks see that they can start multi-currency settling with some of these tokenized deposit, tokenized deposit settlements. And that's just going to keep on increasing specifically when they can earn the interest.
on their tokenized deposit bank settlements as opposed to just holding another company's stablecoin like at Circle, Teva, even Open Standard now I think the banks know they can own the tokenized deposit settlements without having to rely on the circulation and the volume from a company like Teva or Circle etc. So I think that's one interesting and the CBDC angle is obviously one that's
It's obviously died a little bit. I don't want to say it's died because there's obviously a use case in China where it's become so vastly widely used pertaining to its use cases and et cetera like that. So yeah, I think it's all happening at the same time at the moment. And I think it's something that's...
Louis (20:01.816)
Hmm.
Callum Williams (20:12.558)
I do think stable coins are probably the most popular at the moment. I think they're more in fashion, but then again, I also think that maybe we start to look at more consumer-facing digital currencies, something that me and you, we could look into and just maybe pay for our groceries, our retail stuff. Maybe we could use a digital currency that maybe is not a stable coin, maybe is not a tokenized deposit. Maybe that comes around, but at the moment, I'm not sure.
Louis (20:36.746)
Yeah, wait and see then maybe. Okay, well looking ahead then the, I guess the design phase for this ends this year and then it has to go through a treasury assessment, then you know, legislation before anything is real or is you know, applicable to the wider market.
So given that, you know, the length of time and the legislation has to go through, is it kind of, guess, at the minute, you know, stable coins are going to you know, trade finance perhaps, but, know, particularly cross border for years while the digital pound still waits. And do think do those findings even feed a kind of go no go decision on whether a digital pound actually comes into form?
Callum Williams (21:31.885)
Yeah, it's I think when it pertains to the
the regulatory market that's launching next year that's very much around consumer guidelines, very much about holding assets. Just some more of the operation led, operator led, operator focused, should I say, some of those rules and regulations and guidelines that they need to abide by. When it pertains to the whole scope of like CBDCs and digital pounds and et cetera, et cetera, that falls mainly on the Bank of England.
and that the FCA really don't think have got much of a say in, because it's obviously at the end of the day, it's their issued commercial bank money, the Bank of England, And they've obviously been very opposed to stable coins and even CBDCs, I think, as well. They've obviously held tight and pushed back and not really engaged that much when it pertains to this. So it's going, so.
Louis (22:25.101)
Hmm
Callum Williams (22:30.54)
The Digital Pound Lab, what I guess that is, is obviously them showing, we're willing to see what some of these use cases are when it pertains to a CBDC in the form of a digital pound. think they're now willing to see if it's systemic enough to where they can then get this digital representation of a pound to people's online digital wallets in other banking accounts and see, maybe trial it that way. I know that they probably end up looking at
China and even India as well like some of their CBDC pilots probably get some feedback from them and see how they're testing and a phased rollout has done over there I know they've
offered a, I think it's a wholesale CBDC in China or retail one. I think they've offered both actually as well. Some one phase of another. They've obviously also started expanding it to commercial banks now who can also earn interest on that digital one over there in China. So they're obviously so far ahead of the game when it pertains to the CBDCs. And I think the UK and England, what they should start to look at is, okay, let's get through this digital poem lab now and let's see the use cases.
Louis (23:17.122)
Mm-hmm.
Callum Williams (23:43.278)
and then see where we can then start to roll it out, either wholesale or retail.
Louis (23:49.299)
Yeah, I guess we can wait and see as and these kind of sandboxes evolve and how that plays out in the market.
can sometimes be little different, but I guess we'll wait and see. It's going to be an exciting time anyway, looking ahead the next couple of years when these things come into play. That's unfortunately all we've got time for today, but thanks to Callum for joining me. If you've been listening or watching and you're not already subscribed to the Payment Expert podcast, make sure to subscribe wherever you do get your podcasts.
We have plenty more insight and analysis coming over the weeks and months ahead. And for the latest news as it happens, just head over to paymentexpert.com. We'll see you all next time.