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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 Thompsett (00:01.311)
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 Thompsett, news editor at Payment Expert, and back with me today. I'm delighted to have senior journalist here at Payment Expert, Kieran O'Connor. Welcome back to the show, Kieran. Been a been a bit of a while.
Kieran OConnor (00:23.702)
It's been good. I think the last one we did together was on the floor at Money Twenty Twenty, at the start of June. So it has been a while and there's yeah, and there's been a lot happening since then, so yeah, it's sorta good to be back.
Louis Thompsett (00:30.924)
Almost a month ago.
Louis Thompsett (00:39.091)
Yeah, there has been a lot happening, particularly over the last few days. obviously we've had I suppose the the bank setting out how it oversees systemic stablecoins last week and this week as well the FCA publishing it its final rule book in conjunction with the bank too. the FCA as part of that has cut the stablecoin capital charge from two to one percent.
Some say it it's a win for the industry or or or do you think maybe the regulator, you know, it it proves that they can be s talked down? A lot of people had said it was quite high in the first place, that two percent capital charge.
Kieran OConnor (01:22.414)
Yeah, I mean as you said the FCA cut that factor down from two to one percent. in my opinion, I don't think it's that the regulator being taught down as such. I think they've s maybe listened to some feedback, and proportionally reduced it. I I wouldn't go as far as to say that they've been lobbied or been forced into this move. I think it's just a clever move by them and it's sort of good to see that
they're not gonna be too c closed down to what they decide before it and and they are showing some flexibility and the fact that they will change things.
Louis Thompsett (02:02.313)
Yeah, I know that they've sort of admitted perhaps that that two percent was too high in the first place and the change down to one came from industry evidence and I suppose those complaints that that came in about it being too high to be to be workable. and I suppose if you are the FCA, they have maybe over the last few months, years even, been trying to look a bit more pro growth.
after a sort of a long time of being the kind of handbrake type of organisation that that many had pinned on them. So perhaps it's a bit of a a signalling that they're industry, industry first rather than just it being a sheer arithmetic thing or caving to the industry. I think it probably works probably works both ways, both for the FCA in terms of their look in the industry and also as well those participants within the industry who
obviously wanted the the move down from from two to one percent. and alongside that we know that the go ahead, go ahead.
Kieran OConnor (03:04.161)
Yeah, and I Yeah, I was gonna say as well, I guess we're gonna be coming back to some making these comparisons all throughout the podcast today, L Lewis. Sort of comparing them to to Micah and the US. and this sort of margin was a big talking point in them discussions, with sort of dollar coins not having to pay anything extra. So if they are trying to compete, they have sort of at some point got to I don't know,
Louis Thompsett (03:12.693)
Yeah, well.
Kieran OConnor (03:33.035)
relax a little bit, just to try and compete with with these other markets.
Louis Thompsett (03:39.101)
Yeah, we will definitely touch on those other markets a bit later on, but just for the minute, if we can focus a bit on I suppose how the FCA is working with the Bank of England and the bank, another drop was one that the bank announced, which was dropping those holding limits for stable coins, but you know, keeping a the forty billion cap per coin, which I suppose is a bit more proportionate, or you know, perhaps adding a ceiling, although it is a it is quite a high ceiling.
Kieran OConnor (04:07.275)
Yeah. I give you yeah, the bank scrapped the sort of the proposed per user holding cap, and it's replaced it with I believe it's a temporary forty billion issuance guardrail per coin. On the surface I think it looks more usable for sort of foreign users, but it's still sort of swapping one hard ceiling for another. and there is a ceiling there and I know you mentioned it is quite high in in your opinion, but
if one coin becomes a sort of de facto sterling rail, is it that high? and then there's also the guardrail is sort of being framed as this temporary and it is subject to review, but there's sort of been no clear guidance on when this review will be in place or how or when it moves. So I was sort of wanting to get your opinion, Lewis, on
Do you think they need to plan that far ahead? Or no, we're not we're waiting until twenty twenty seven before th these rules even come into force. But should there be something in place already?
Louis Thompsett (05:00.298)
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Louis Thompsett (05:08.338)
I mean, I suppose it it you could say it's wishful thinking or having something there in place, should there be a you know a a a a dominant sterling denominated coin that that comes to market. No coin at the minute's with within sight of that cap at the minute. we're not on the level of USDT, US DC, the US stable coin seems to be dominating that in in a minute. but I I I suppose if you're
If you are the kind of bank and you're setting these rules up, a a cap that kind of never never binds still sells a sends a sort of a signal to to issuers about how much room the UK is willing to give them. So it's a high cap, but it means there's room for growth and it's kind of, I suppose, it's handing out giving a handout maybe to the energy to say, look, here here's here's our cap, here's all how we would like stablecoins to sort of here's the limit, we're gonna make it really high.
So it's looking industry friendly, industry forward, rather than putting a blocker on anything, I think. But as and when obviously a a UK stablecoin gets to that level, it's I mean it remains to be it remains to be seen at the minute. And if you sort of take some commentary that we've had in this week, or I've well I've received a comment from Clearbank and and their CEO Mark Fairless, who said it's
Near impossible for a bank to issue a a a viable sterling coin at the minute. There's no commercial viability, which I suppose is a another angle to look at. When it comes to the UK's approach to the stable coins and whether or not they're commercially viable, what's your take here and what do where do you think the UK stands following these latest string of announcements?
Kieran OConnor (06:55.628)
Yeah, I mean, if the banks specifically say that they can't make this work, does it mean that the regime isn't built for them and it's more built for fintechs and PSP issuers rather than banks? I know the EU's micra sort of restricts issuance to sort of credit institutions and e money firms. but yeah, i i it it is really interesting to hear that from Clearbank.
Because obviously it's quite it's quite a lot harder for them. I mean, the bank issuer has to sort of satisfy its existing sort of bank capital rules and you have these new stablecoin prudential ones stacked on top of that. where sort of maybe someone who's just in fintech, like a a pure a pure FinTech issuer only has to deal with these new rules. So it is quite interesting to see that banks are already raising concerns, especially when we've seen in the US, I mean
the banks seem a lot I know now I know there's been a lot of discussions and debates around rules and they've not always seen eye to eye. But they d but they do seem to be a bit more active in in the conversations and seem to be sort of willing to take part in stable coins and sort of adopt them and use them. so it is quite interesting that the UK has sort of maybe gone with this one size fits all approach, was it i is that how you would view it?
Louis Thompsett (08:20.988)
Yeah, I will I I I kind of look at the I I think the the criticism probably lands on on the yield debate, which is what how the US had that debate whether you know, th that they could earn yield it was the Coinbase pushback, which we've seen around the Clarity Act and and and around Genius two. Obviously the in the UK I believe as the rules are set up now an issuer can hold I think thirty percent at the bank.
And 70% in in the guilt in those short dated guilt, which I suppose limits what it can earn, what a bank can earn on the on the float. and issuers can't pay the yield to to holders to compete for the deposits either. So yeah, I suppose if you set that against how things are shaping up over in the US where you know, issuers that can earn the sort of full treasury yield, it maybe makes the sterling
economics look slightly thin, but I I suppose from the bank's perspective it's it it's ha their line on it. And I know obviously Mika in Europe as well has rules o on o on those caps as well. But I I suppose it does suggest maybe from from an industry perspective, from a growth perspective, that maybe the US is the more friendly when it comes to this and giving
stable coins that kind of leverage to to to earn yield essentially. I think one thing that's interesting, just lastly on on the UK, before we maybe dive into a bit on I know we've kind of already touched on it already, the the US and Europe, but no, it's fine. Well, it was going that way anyway, so it may be worth covering. just interesting to see the I mean obviously the UK wanted a more joined up regulatory approach to stable coins. Not just that, but AI and things like that as well.
Kieran OConnor (09:58.209)
Yeah. Apologies.
Louis Thompsett (10:16.147)
But they've joined up the FCA and the bank on this. So it's kind of two regulations, one issuer. they take different parts of the regulation around stablecoin. d do you think that's a sign of I guess a more collaborative approach from from the UK by having two bodies that that work together?
Kieran OConnor (10:39.766)
Guess, yeah. I mean, correct me if I'm wrong on this, on the on on the details, and all the news has only sort of come in this morning. but so the FCA regulates all the qualifying UK stable issuers. but then once HM Treasury sort of dead sort of designates an issuer slash system as systematic, the Bank of England then takes the sort of prudential lead under a joint oversight, that's correct, yeah.
Louis Thompsett (11:04.947)
Yeah, I think that's right. Yeah.
Kieran OConnor (11:09.196)
I mean, it looks like a clean handover, sort of on paper. And probably on paper it it it looks a lot smoother than what it will work in in practice. I mean there is a twelve to thirty-six month sort of transition window and sort of a path for backing assets which sort of genuinely answers sort of this cliff edge worry, I guess, if it's if you g if if if you're going for one regular one
one regulator to another. But the one issue that I sort of had when I was sort of scanning and and r reading your article from this morning list, which w which was amazing by the way, is sort of there's an unknown trigger. so HM Treasury treasury sis systematic designation, is it a political slash judgment call? Is there any actual numbers that it uses to decide when this trigger
comes into play or is there a threshold? I I'm not sure.
Louis Thompsett (12:13.687)
th that's a really good question because I I I'm not sure either. It may be in the details. as it may be something that plays out as time goes by and it's probably not something there's precedent for because I think the UK is probably the first country or market to adopt this two-tier design. It's quite unusual. You don't have other nations sort of splitting the regulation between different regulatory bodies, basically.
So it's it's definitely a a point of di of difference that that the UK's gone down, but I think it maybe stems from a a greater desire across different governmental departments in the UK to have firmer collab collaboration and be more integrated. so I think it's it it's something that works for the UK. whether or not it would work in other pla you know, in other jurisdictions is up to them, really.
Kieran OConnor (13:05.184)
Yeah.
Louis Thompsett (13:10.237)
But yeah, w as I say, we wait and see. I mean, the rules don't really fully bite or come in until October twenty twenty seven. so i there's a little leeway there, a little runway, but do do you think it's kind of prudent? Is there enough space for for compliance here? Or do you think we might end up somewhere where firms are arriving very late? I mean, if we look
Time this podcast goes out, it's it's the first of July. So that's the deadline for for me Ike, and you're still seeing loads of firms coming in on that pretty last minute. Do you think you you may end up seeing something similar for the new FCA Bank of England joint stablecoins regulation?
Kieran OConnor (13:56.96)
Yeah, I think so. I definitely think so. I mean, on paper again it sort of looks sensible. They have the rules, then they put the application window in, then they go live by a certain date. but there's still a lot of moving parts in the sense. I think there's like the HMT's payment consultation and a systematic designation process in itself it sounds like it yeah. and that all sort of
needs to land before that October twenty twenty seven deadline. so I can definitely see some latecomers and it it maybe not going as smooth as as it looks, even though I d I know that a lot of the comments that we got in today sort of spoke about how these new rules give firms clarity and and a bit of reassurance. So yeah, it probably won't go completely smoothly and there will be some latecomers but I think the fact that they're in place
We're moving forward, there's progression. let's not get tied up in in the details of when it all happens, I guess.
Louis Thompsett (15:04.115)
Sure. Yeah, no, yeah. Maybe, yeah. We'll we'll wait and see as it as it comes in. All right, let's get into what we really want to talk about, which we keep mentioning and then kind of skirting off of, which is how I suppose the three main regimes shape up against each other. You've got Genus in the US, you've got Iker in Europe, and obviously now here in the UK we have the FCA banks' new new crypto rules. So the US I suppose it it issue as you know
Hold short dated treasuries with no minimum bank deposit allocation. the issuer keeps the yield, we mentioned that. which is I suppose what makes a dollar coin a a genuine business or a viable business, and it helps it's it's a commercial option. The EU forces sixty percent of the reserves we spoke about into into bank deposits for significant coins, which I suppose caps the return, which is why we've seen the likes of Tether.
leave the market completely and obviously we've mentioned the UK with 30% at the bank, 70% in in the short guilts. So somewhere in the middle, I mean it it it's one of those where the debate is around I guess safety and viability, right? If it's viable, if it's you know it's commercial led, then you you'd look at the US. But when it comes to the
safety designs, having the right balances in place. that's what obviously Europe's looked at and what the UK is looking at too as well. What's your take on it, Kieran? Do you think we need or do you think the the US model's the the way to go or are they, you know, that could there be repercussions down the line in the US should
Things go awry, markets shift and change, are they more vulnerable? us is it you know, the UK and Europe, is that a better safety net?
Kieran OConnor (17:07.019)
Yeah, I mean, first of all, I think you've got to when I think you've got to look at the motivations. I think they all come from a a different perspective. I mean, the US is is the leader in the space already. They're they're not playing catch up with anyone. They're just sort of happy cruising, doing w doing what they have been doing. I'm sure there might there may be some of them in the US who are maybe concerned that they haven't prioritised safety over sort of getting things through quickly.
but at the minute they're the top dog and you know, I'm pretty sure they'll be happy with that. You then you've got to look at the EU and the UK and I think obviously like you mentioned that we've both gone for the more safe route, and put quite stringent restrictions in place. but I think they've they have to be careful. I mean, they can't have their only motivation being dollarisation and
trying to catch up. They've got to think in five years, three years time, when everyone's active and all the markets are open, will they regret not putting restrictions in place? And I feel like that regret or that that possibility of regret, holds much more power than the idea of maybe we can catch the US and become top dog. I mean, yeah, it's
It's not that bad and also I f I feel like the UK's sort of rules don't look too restrictive. I think they've sort of captured a nice middle ground in my opinion. I mean the UK sort of requires them thirty percent of reserves to be sort of kept in non interest burning bank deposits, which is I would say a lot less strict than the e the than the EU's, which is about a sixty percent requirement. So, you know, at the minute there it seemed like a nice middle ground and they've taken a sensible option.
Louis Thompsett (19:06.448)
Yeah, I mean I think it's worth mentioning as well, lastly, just how they've been well, I I suppose how these regulations have come into play, they've all followed different routes. I mean, the US went the legislation path, the EU wrote the you know, a big rule book, the meeker is essentially a a big rules based body of text. And the UK has basically left it to the the regulators to work it out between them, which they've have, I suppose. So there's three
roots of of of regulation there. and I suppose if you are the UK, one thing maybe it does do is suggest that that there's a bit more coherence between the different governmental regulatory bottles, bottles, bodies, I should say, than it's than its peers. And I suppose it is maybe also if we look at the the interoperability angle, because I know the the Bank of England were looking at
having a an interoperability layer that could, you know, shift between, you know, A2A schemes, stable coins, C B D C is a digital pound. so it it it's a bet on that. And I think the joining up is it is a look towards that. And you know, if if the different regulatory bodies can come together, it maybe bodes well for potential interoperability in other things, which I think is the key point today. but then again the US
tends to leave things to the private market, so perhaps those interoperability mechanisms and schemes could also come to fruition over there too.
Kieran OConnor (20:44.616)
Yeah, definitely so I mean pretty much second that. the US by no means is sort of finished on their regulations and like you said, sort of they sort of leave it to the private market to innovate and sort of lead from the market. So I wouldn't be surprised if we saw developments over there in that space. Which sort of also creates an issue I guess when you sort of the UK and the EU in
the sort of sense of they are playing catch up and they're trying to take a more cautious approach. But you still don't know what the US could do in a couple of years because they are a bit more I don't know how you would say it, like sort of market led. One day they can get up and they can decide something and it'll sort of with Donald Trump in charge you can try and push it through as quickly as possible. So you just can't compete with that speed and that sort of
Louis Thompsett (21:30.823)
Market led, yeah.
Louis Thompsett (21:40.775)
Yeah I mean.
Kieran OConnor (21:43.626)
power, so I think they've just sort of got to focus on themselves and make sure that they've got the sort of own house in order.
Louis Thompsett (21:51.803)
Yeah, I think yeah, the US leave it to the market and then should regulation be needed, deal with that after. And then perhaps they get a bit slower. there. Europe, focus on on on the rules book. I guess full fully sovereign for for the EU as well, making it their own model and the UK somewhere in between. but it's been great to talk to you and have you on again, Kieran. But unfortunately for anyone
Listening or watching, wherever you've been listening or watching, that's all we have time for today. If you're not already subscribed to the Payment Expert Podcast, please do make sure to subscribe wherever you get your podcasts with plenty more insight and analysis coming in 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.