As the U.K. accelerates its efforts to establish a robust regulatory framework for stablecoins, the evolving landscape presents both opportunities and challenges for market participants. In this episode, Joseph Kamyar is joined by Perry Scott, senior policy and government affairs manager at Kraken and chair of the U.K. Cryptoasset Business Council, to discuss the latest proposals from the FCA and Bank of England. They explore the implications of systemic stablecoin classifications, backing asset regimes, holding limits and remuneration restrictions. Tune in for an insider’s perspective on how the U.K.’s approach compares globally, the potential impact on business models and what the future may hold for a successful pound sterling stablecoin market.
Episode Summary
The U.K. has been “slow to the races” on stablecoins, “but that has its advantages,” observes Perry Scott, senior policy and government affairs manager at digital asset platform Kraken and chair of the UK Cryptoasset Business Council. “It's allowed us to take a look at the market as it's evolved.” Perry joins “Fintech Focus” host Joe Kamyar to explore the evolving stablecoins market, including the transition from FCA regulation to the Bank of England.
Key Points
- Industry Wants Certainty: The biggest factor for stablecoin issuers is understanding the roadmap for transitioning from FCA regulation to Bank of England systemic oversight. The industry needs clear signals about thresholds and timelines to plan operational changes between two very different regulatory regimes.
- The Backing Assets: The more regulators move away from remunerated backing assets, the less commercially viable stablecoin arrangements become. “My worry is that we have a 60/40 split at the moment,” Perry says, adding, “I think the industry would love to see the bank move closer towards maybe 80/20, 90/10, and to understand a bit more of the bank’s concerns in this space.”
- Holding Limits Controversy: The Bank of England’s proposed £20,000 limit for individuals and £10 million for businesses is the most controversial element of the proposals, Perry suggests. “I think a lot of businesses on the wholesale side would find that limit breached quite quickly.”
Voiceover (00:01):
Welcome to Fintech Focus, Skadden’s podcast for fintech industry professionals. The global regulatory and legal updates you need, start now.
Joe Kamyar (00:15):
So hi there and welcome to another episode of Fintech Focus with me, Joe Kamyar. And today we’re very lucky to be joined by Perry Scott. Perry is senior policy and government affairs manager at the crypto exchange Kraken and also chair of the UK Crypto Asset Business Council. So Perry, welcome to the podcast.
Perry Scott (00:32):
Fantastic. Thank you for having me.
Joe Kamyar (00:33):
So today the topic is stablecoins, and specifically we’re going to talk through the FCA proposals, Bank of England proposals, and the regime that’s coming through in the UK. And it’s probably fair to say in the UK, we’re playing slightly catch up with Europe through MiCA, US, through GENIUS Act, among others. So I guess the first question is where does the UK stand at the moment? And as you know, Perry, we’ve had the FCA proposals which came through middle of last year, their consultation closed in July. We’ve had the Bank of England proposals come through November. Their consultation closes this month. So lots of activity, lots going on. I guess the most recent proposals are the Bank of England’s will be focused on those slightly more than others, but if you look across them, there’s some kind of common themes.
(01:13):
So I think the topics we’ll touch on today are systemic importance and what that actually means, backing asset regimes, so those are the assets, underpinning the value of the stablecoins, controversial holding limits of Bank of England, and also remuneration and what that potentially looks like for stablecoin holders. So I guess before we actually jump into the detail, I think it’s fair to say if you look at where regulators started, they’ve tried to bridge some of those gaps with industry and that they have moved over the past few months from their kind of opening positions. My first question to you, Perry, is, is that a statement that you agree with? And are you happy, broadly speaking, with the direction of travel with UK policy frameworks at the moment?
Perry Scott (01:52):
Yeah, it’s a great question. I think the short answer is we’re getting there. I think you’re right to say we’ve been slow to the races in the UK on stablecoins, but that has its advantages. It’s allowed us to take a look at the market as it’s evolved, to take a look at other frameworks as well. You mentioned MiCA, which obviously was first out the gate. And it’s given us an example to also watch what’s happening on the other side of the Atlantic as well. So on the US side, a raging debate, which continues to go on, fascinating, but potentially the hottest topic in global finance right now, I think a lot of people would agree. So I think the UK does have a recognition we need to be at the table with the stablecoins and we need to have a regime that’s competitive that ensures the continued prominence of GBP on the world stage, particularly.
(02:34):
And it’s just about getting those details right now. So for us, you mentioned they’re rightly the FCA proposals we saw last year. We now have the next iteration of the Bank of England systemic stablecoin proposals. I think you’re right to say that the regulators have engaged very well with industry. I think they’ve come a long way to meeting the demands from industry in terms of the various backing assets for enumeration and the various topics you described there. But I think the next challenge is just exploring how they fit together. So the Bank of England systemic stablecoins regime, and sorry, and the FCA’s sort of regular regime for stablecoins, and also just putting a bit of a wrapper around it for the UK and understanding what is our national strategy. We’re seeing other countries lean in heavily to the stablecoin narrative and understanding that getting it right means continued usage of their domestic fiat currency. So yeah, I think it’s a really exciting time, a lot going on and plenty to talk about on this podcast.
Joe Kamyar (03:25):
Okay. So let’s jump into some of the detail. And I guess the first point of distinction which you’ve touched on is systemic stablecoins, what are they and the kind of system we’re kind of seeing develop between the FCA supervisory approach and the Bank of England. So if we look at what’s come through from the Bank of England, they’ve tried to be helpful. They’ve put out some guidance around what the regime will look like for systemic stablecoins and what they consider to be systemic stablecoins. I guess what’s your sense of the market’s reaction to this two-tier approach?
Perry Scott (03:56):
Yeah. So I think the biggest factor for industry is understanding the roadmap and understanding when a stablecoin issuer goes from being regulated by the FCA to becoming of systemic importance. I think that’s the main factor is that the industry wants that certainty. I know that the current Bank of England proposal does carve out that transition period as a topic of future discussion, so it doesn’t have all the answers in this paper. But I think that’s so important as a signal to industry. I don’t think the industry is necessarily against it as a premise, but I think that certainty is so important. So when we’re talking about systemic stablecoins, what are we talking about? Is it existing tokens that tend to be in scope? Is it hypothetical? Because the definition of systemic is really important for what we’re talking about here. So taking the standard definition, which is of systemic importance to the UK financial system is fair to say we’re probably even with the most aggressive adoption curve for stablecoins, some way off that, several years.
(04:53):
So I think that a lot of it, the detail sort of flows from that definition and what are we actually talking about here? Because I think over the past few years, as industry’s been engaging with these proposals, I think there’s been a bit of cross paths, but it’s great to get at the table with the regulators. The Bank of England does an amazing job as it relates to financial stability and ensuring that. So I think the questions they’ve raised in the consultation are legitimate ones and one the industry has been engaging with in good faith. So yeah, it’s been really interesting conversations.
Joe Kamyar (05:19):
So I guess on that, I mean, at a high level for listeners’ benefit, as you move from the FCA non-systemic regime to the Bank of England systemic regime, I think there’s any surprises that we’d say you’re going to a more onerous regime under the Bank of England. So it’s clearly important for issuers to be able to plan for that, as you said. So do you feel that there is a sufficiently clear boundary at the moment? Do you think the guidance is there to give that clarity to issuers or do you think more could be done? I mean, certainly if you look at the Bank of England proposals, there’s lots of qualitative criteria. They haven’t gone as far as to set out numeric thresholds, quantitative thresholds. And do you think that extra layer of clarity is going to be helpful for issuers?
Perry Scott (05:56):
Again, it’s a great question. I understand why the bank has resisted putting a figure on it because then suddenly further down the line, that focuses all the attention. And it’s not within the bank’s gift necessarily to deem a system or systemic, that’s been the gift of the treasury, as you know. So I understand why they haven’t, but also it has led to a bit of confusion because nobody quite knows exactly what we’re talking about here. I think that transition period is of utmost importance as well, not least because there are differing regulatory requirements between the two regimes. So particularly if you look at the backing assets of the model and how the whole commercial elements of the stable coin arrangements work, you go from FCA’s regime with 95% in HQLA, whereas in the bank’s proposals, you have to basically wind down to have only 60%. So there’s definitely operational challenges there for issuers. And I think that certainty, which has been signaled for another work stream is really important. So we’ll be looking out for that later this year.
Joe Kamyar (06:47):
Yeah. So I guess on the topic of banking assets, as you said, Bank of England regime is expecting systemic issuers to have 40% of the banking asset pool in unremunerated central bank deposits with the balance solely in essentially UK government debt securities. If you compare that to the FCA regime, they can have essentially up to 95% in a potentially broader scope of high quality liquid assets, although it’s still not that broader scope of HQLA and then 5% of that then needs to be in on demand UK bank deposits. Looking at that kind of package across the two tiers, looking at the UK offering as a whole and backing assets, how do you think that stacks up globally and kind of pegs us against MiCA, GENIUS Act and other key markets?
Perry Scott (07:28):
The backing assets are super important requirement because they provide the whole commercial basis for the token. So I think that as we’re looking at it, we have this account to account infrastructure where you’re able to make very cheap, very fast payments in a way that doesn’t need a lot of the legacy banking infrastructure. Now, instead of levying fees into the system, what we see is the stablecoin arrangements are able to earn interest off the backing assets. So that provides the commercial basis. Now, the worry from the industry is the more we move away from remunerated backing assets, the less commercially viable and attractive stable coin arrangement becomes, especially when you layer on all of the other requirements that going on with it. So my worry is that we have a 60/40 split at the moment, as you mentioned. I think the industry would love to see the bank move closer towards maybe 80/20, 90/10, and to understand a bit more of the bank’s concerns in this space, which I don’t think we’re particularly clear in the paper.
(08:22):
My worry is that without that, the temptation comes to levy fees and the pressure comes to levy fees into the system in a world where we’ve already eradicated the need for interchange fees, for instance, for merchant fees, et cetera. And that just kind of by regulation tends to bring in the ills of the previous system. So that’s something I think that needs to look at, although we do welcome the bank’s movement on this because the previous proposals had 100% of banking assets in remunerated accounts, which was quite extreme to say the least.
Joe Kamyar (08:50):
So on the topic of extreme proposals, the one which has probably sparked the most control obviously is the Bank of England holding limits. So what the Bank of England proposing, as you know, is a 20,000 pound per coin limit for individuals, up to 10 million for businesses with some kind of limited exceptions around that. I don’t think I’ve seen any examples in other jurisdictions of that being proposed, but it is being pitched for the Bank of England as a transitional measure. So I guess my question to you is, do you think it’s A, necessary and proportionate? And given it is being pitched as this transitional measure, do you actually see any longer term consequences flowing from this?
Perry Scott (09:24):
Yeah. So from my perspective and from what I’ve heard from my injury colleagues, I think this is potentially the most controversial of the proposals, not at least from a philosophical perspective. I think it’s not quite clear exactly what risks the bank are trying to mitigate through these holding limits. So you mentioned 20,000 pounds for the individual, 10 million for businesses. I think a lot of businesses on the wholesale side would find that limit breached quite quickly, especially when you look at treasury functions, you look at strong cases for exporting firms who deal a lot with FX interchange. I think that we’d really like to see a world in which the case of this is articulated a bit clearer, to be honest with you. I think that what we’ve seen is that the bank have said it’s to allow them the time and the space to understand how stablecoins work in the system.
(10:09):
My retort to that would be, I think that we will have that time. I think that I mentioned that with some way of having a systemic stablecoin in the UK. So I think naturally, if we’re looking at several years down the road, the bank will be able to work with the FCA to understand the various business models that come through and as they evolve. And I think that gives the bank a chance to then understand exactly where the risks are. For that being said, I don’t think the industry would begrudge the bank having the power to introduce limits if it was them deemed necessary, but I think introducing these sort of ex-ante limitations, quite powerful negative signal to the UK and to broader investors who may be looking to set up stablecoin issuance here, because it’s basically read as we see stablecoins as a threat and not as a sort of friendly instrument.
(10:56):
But I think that that negative sort of message can’t be undersold. I think we really need to lead in and have a really clear narrative around it. And yeah, this is just all the great work that’s going on with the FCA, with the bank’s proposals wise, and also with the governments leaning into the space, I think is undone quite quickly when you send these kind of messages.
Joe Kamyar (11:14):
Okay. So maybe let’s touch on remuneration. You touched on this earlier. So when you talked about the business models of issuers, clearly a big part of it is generating returns off the backing asset pool. And what we’ve seen both from the FCA and PRA, and actually I think it’s fair to say most regulators globally is a general restriction on the idea that any of those returns can be passed on to coinholders in the form of interest or dividends. And that basically stems from the fact that regulators are looking at stablecoins theoretically as a payment-like instrument rather than a deposit or investment-like instrument. So I mean, how disruptive do you see that being to business models and how do you think that kind of pitches stablecoins vis-a-vis other financial products in the market?
Perry Scott (11:56):
Yeah, I think that the sort of yield debate, as we’ll call it, is one that’s fascinating, It’s one that is playing out simultaneously in the UK and also the US as well, as well as MiCA and they’re looking at this again with fresh eyes. I think it goes to the heart of what are stablecoins? What do we want them to be? What do we want the outcomes to be? So I think that from our perspective, a lot of entry peers, they say, why not allow stablecoin issuers to pass on the backing asset interest onto consumers? Because it’s a pro consumer move. It means that basically everyday person is getting a better bank for their buck from their assets. I mean, I understand the case against as well. The Bank of England particularly is strong on this, that they see this as a way of disintermediating the banks, that they’ll see deposits moving into stablecoins more quickly, which has a few knock-on effects.
(12:43):
First of all, a negative impact on credit creation. So banks play an important role in creating credit works through mortgages, lending and other products. They feel like this will negatively impact their liquidity, which is an interesting consideration. But also, yeah, just allowing stablecoins to operate in this way they see as a broader financial stability risk. I think that it’s understandable, to be honest with you. I think that the debate we’re having in the US is, “Okay, what about if it’s... We need incentives for adoption of stablecoins if we want to really realize the benefits. So what about rewards.” For instance, there’s a distinction between whether it’s part from the issuer or there are other kind of incentives. So I think that’s where the debate is going, something that the industry’s engaging with. There are various different views amongst that, but certainly fascinating. I think the big question is, to what extent are stablecoins pure substitutes deposits and how will they be implemented in the future?
(13:34):
Will we see banks turn to stablecoins en mass and basically purely deposits? Was it a case of what we see at the moment, which is people have their fiat deposits and their regular bank accounts, they also have crypto wallets their stablecoins in. I think they’re two very different topics that we deal with. And I think the threat is one that’s perceived rather than realize at the moment, but we understand that the bank’s got every right to understand what would happen if this developed at scale, for instance. So it’s fascinating academically, one that we’re going to keep an eye on as it evolves on both sides of the land.
Joe Kamyar (14:05):
Perry, stepping back, based on what we’ve just discussed, it seems like there’s lots of areas where you’ve seen very positive progress with regulators and it sounds like there’s some topics where you think they need to pause, reconsider, reflect. But if you can look at the trajectory at the moment, direction of travel, are you confident that the UK at least is setting itself up for a pound sterling stablecoin market succeed?
Perry Scott (14:27):
It’s a million dollar question. Yeah, like I said at the top, I do think we’re getting there. The details aren’t quite there yet. They’re being ironed out, but I think we’ve got every foundation to be able to really succeed at GBP stablecoins. And yeah, I just really hope that we’re able to realize the opportunity because I think the paradigm shift that it proposes for the financial services sector is so huge and can definitely go a long way to improving everyday people’s financial lives as well. Because for instance, we know that with the current setup, there’s a suboptimal outcome for consumers, whether it comes to cross-border remittances, which are costly, timely, and quite cumbersome versus everyday bank accounts like the Chancellor rightly said in a Lead to Reform speech last year that 29 million people have money and interest accounts only about 1%.
(15:09):
So I think it’s great to have this conversation about how can the financial services sector work better and deliver more for the consumers, and I think stablecoins are at the heart of that. And I think there’s a lot more to go around this, but stablecoins is just so foundational for their role, not only just in payments, but also as just a general financial services infrastructure, as it relates to tokenization, as it talks to the broader financial services infrastructure. So it’s really exciting. I’m glad that the UK is leaning in and hopefully we can realize those benefits.
Joe Kamyar (15:35):
Well, I think it’s fair to say industry has been making those points to regulators. Consultations have been ongoing, so it’ll be fascinate to see where we land on that. But Perry, thank you very much for your time. Pleasure having you on the show.
Perry Scott (15:43):
Thank you. Absolute pleasure.
Joe Kamyar (15:45):
And thank you to everyone listening. See you next time.
Voiceover (15:48):
Thank you for joining us on Fintech Focus. If you enjoyed this conversation, be sure to subscribe in your favorite podcast app so you don’t miss any future conversations. Additional information about Skadden can be found at skadden.com.
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