Andrew Bailey outlined what payments market participants can expect from regulators seeking to address financial stability risk in the world of payments, including as part of the rise and adoption of global stablecoins.

By Brett Carr and Stuart Davis

On 3 September 2020, the Governor of the Bank of England (BoE) Andrew Bailey delivered a speech “Reinventing the Wheel (with more automation)”, in which he outlined regulatory changes that payments market participants can expect, including as part of the global regulatory response to stablecoins.

The Changing World of Payments

Even before the COVID-19 pandemic, the use of cash in UK transactions was on the decline. For non-cash transactions, payments have traditionally been made in commercial bank money using systems that settle in central bank money across reserve accounts held by banks. Regulatory oversight of these systems operates to ensure resilience and legal finality of settlement. However, Mr. Bailey acknowledged that advancements in payments, including crypto-assets such as bitcoin (in his opinion “unsuited to the world of payments”), alternative payments such as e-money, and stablecoins have begun to strain the traditional legal regulatory framework. The creation of these technologies coupled with the trend towards widespread use of non-cash payments, emphasises the importance of ensuring robust payments systems, and standards for system participants, are in place.

The BoE’s Financial Policy Committee has set out principles to respond to these significant changes in the payments landscape on the basis that, “payments regulation should reflect the financial stability risk, rather than the legal or technological form, of payment activities”.

The Innovation of E-money

Mr. Bailey remarked on the need for the “less-developed standards” under the e-money regime to be better understood by users. He pointed to the lack of a depositor protection scheme, limited capital and liquidity requirements, and no resolution or administrator regime as potential risks for users.

Payments firms should also note that the Interim CEO at the FCA, Christopher Woolard, briefed his Board at its July meeting that, “the inherent challenges of the payment and e-money sectors regarding low capital and high risks were recognised,” and that “HM Treasury was also being engaged regarding the ongoing regulatory challenges associated with these sectors.”

Should UK payments firms expect a post-Brexit bonanza of regulatory change? The rhetoric of both regulators suggests that the sector has attracted keen attention from the highest levels.

The Rise and Halt of Global Stablecoins

Global stablecoins seek to apply new technology, stemming from the world of crypto-assets, as well as changing some of the fundamentals of the underlying payment chain. Global stablecoins change not only how customers pay, but what they pay with — rather than a transfer of money between bank accounts, stablecoin systems transfer the asset itself (the stablecoin) from one person to another.

Mr. Bailey emphasised the importance of not stifling innovation and highlighted the benefits that stablecoins, in particular, could offer. The benefits included “reducing frictions in payments, by potentially increasing speed and lowering the cost of payments,” as well as increasing convenience through integration with other technology, such as social media platforms or retail services. Notwithstanding these benefits, Mr. Bailey stressed that payments have reached the point in the cycle of innovation that requires standards to be set and “[i]f stablecoins are to be widely used as a means of payment, they must have equivalent standards to those that are in place today for other forms of payment types and the forms of money transferred through them. This will ensure that they are safe and resilient and that consumers can use them with confidence”.

However, some stablecoin proposals fall short of the standards equivalent to those expected of commercial bank money concerning stability of value, robustness of legal claim, and the ability to convert into fiat money at par. Mr Bailey considers the expectation by the public that payments carry the assurance that comes with money as the “overarching point” for innovation in payments.

Mr. Bailey echoed sentiments expressed by the G7 Working Group on Stablecoins, namely that global stablecoin offerings will need to demonstrate how they meet domestic and internationally agreed standards “before the global regulatory community can be comfortable with their launch and widespread adoption”. As for the launch of multi-currency stablecoins, Mr. Bailey remarked that “the starting point for a global stablecoin should be based on single currencies. We should not run before we can walk”.

Following consultations in April 2020, the Financial Stability Board, which has been coordinating the international response to global stablecoins, is due to publish its final report in October, with a view to establishing a baseline set of expectations for global stablecoins including the following:

  • Stablecoins should be regulated based on the functions they perform and risks they create.
  • There should be comprehensive domestic and international regulation and supervision.
  • Stablecoins should have robust governance and risk management, and should be transparent about their stability mechanisms and coin-holders’ rights.

In addition to supporting the efforts to establish a baseline set of expectations, Mr. Bailey noted that there needs to be a, “clear G20 mandate for the various sectoral standard-setting bodies to consider their standards and whether they need to be refreshed or clarified in light of stablecoins”. The Committee on Payments and Market Infrastructure and the International Organization of Securities Commissions are already working to communicate how international regulatory standards and supervision for financial market infrastructures, including payment systems, will apply to stablecoin developers.

Mr. Bailey further mentioned that the BoE will “strongly consider” the need for a stablecoin that intends to launch with sterling-based activities in the UK to be incorporated in the UK.

As for central bank digital currencies, and the notion that they could be harnessed without the need to develop the protections required for stablecoins, “it’s a very big question,” Mr. Bailey commented, and the “answer is not in yet”.