Financial Services and Markets Bill (Second sitting)

Martin Docherty-Hughes Excerpts

Committee stage
Wednesday 19th October 2022 Public Bill Committees

[Craig Tracey]

Q On the technological side of it and the flexibility, do you think there will be a culture shift as a result of the Bill to try and encourage the regulators to be more nimble and flexible?

Sir Jon Cunliffe: With the greatest of respect, I do not think I need my culture shifting, within the regulatory framework that we have at the moment. I have made a series of speeches on new technology and the benefits that new technology can bring and the importance of that, so I would not regard myself as in that position. Others might have a different view and are obviously entitled to it, but I certainly would not accept that, if I can make that point clear. You can look at the published statements of the Bank of England and the speeches we have made.

We welcome schedule 6 of the Bill because it will give us the powers to put in place a regulatory framework for stablecoin and digital assets used as payments. I would argue, because I hear this from lots of the fintech community in London, that they want a regulatory framework. They do not want a system where the public think, “This is unsafe. What happened to Terra and LUNA could happen to me. I could be scammed. I am betting in an unfair casino.” They actually want a regulatory system. They want it to be designed to recognise their technology.

There will always be tension between where we put the risk cursor and where the private sector would like it to be put. That is a discussion we have to have. The importance of this Bill is that it will give us the powers to get on and do it. I do not think I would accept the criticism that our culture is anti-innovation and inflexible. We need the powers and the tools to do that job and that this Bill will give us them.

[Martin Docherty-Hughes (West Dunbartonshire) (SNP)]

Q It is good to see you, deputy governor. In June this year, at the annual lecture of the Bank for International Settlements, the former Governor of the Bank of England —who I believe is your former boss—said in relation to stablecoin, the adoption of cryptocurrency and the concerns about systemic crises:

“In baseball, it’s three strikes and you’re out. In cricket, it’s only the equivalent of one. For systemic payment systems, one is too many. If that means, as it must, very rigorous oversight and rules for private stablecoins, what would then differentiate them from CBDCs?”

First, could you answer the former Governor’s question—what then does differentiate them from a central bank’s digital currency? Secondly, I am glad to hear you rightly say that the industry wants good regulation; is this regulation rigorous enough to enable that to happen?

Sir Jon Cunliffe: I do not normally contradict my ex-colleague and boss, Mark Carney, but I would say a number of things. On the landscape, let us be clear about what we are talking about: we are not just talking about new forms of payment systems; we are talking about new forms of money. Most of us do not realise it, but when we use our credit card, phone or cheques—if we use cheques—we are exchanging private money, which is our deposits at commercial banks. What these stablecoin proponents propose to do is create a new settlement asset—that is, a new form of money—to be used in transactions. I think that is why Mark said that when a payment system—the money going through it and the mechanism for transferring it—breaks down, then one of the basically essential services in the economy, like water or electricity, breaks down and transactions cannot happen. So you do not get one strike: if the payment system goes down, people cannot transact at scale. This is fundamental infrastructure, if I can put it that way.

The money that travels through these payment systems is also fundamental to society. It needs to be robust and safe, and history has lots of examples of what happens when people lose confidence in the safety of the money they are holding and transacting. That is why these things are crucially important. However, 95% of the money that we use in our economy is not public money from the Bank of England but private money from commercial banks, and I do not see, a priori, a reason why a new form of private money could not emerge using different technology in the way that stablecoins have proposed. What I will say, and the financial policy committee at the Bank has said this very clearly, is that the money that they use and the transaction machinery that they use must be as robust as the money we are using from commercial banks or the Bank of England. The public should not need to think, “Which money am I using?” It should all be one money of equivalent value.

I think there is a world in which you have a CBDC, stablecoins, commercial bank money and Bank of England cash, which we will produce as long as anybody wants it, and those things are interchangeable and people use them interchangeably—we use the moneys of different banks interchangeably now—but the regulatory system has to be strong and make it very clear that if what you are offering is a better service, an innovation, that is fine, but if it works because it operates to a lower standard, that is not fine.

[Martin Docherty-Hughes]

Q Let me say a little extra on that. I do not want you to conflict with your former colleague, but—

Sir Jon Cunliffe: No, no, it is fine. We are friends.

[Martin Docherty-Hughes]

He did say this, which I take in terms of stablecoin as well:

“Ultimately, crypto either has such extrinsic value without a use case, or has a use case as an NFT that perfects ownership (which is niche by definition in that it is non-fungible).”

His critique is that it becomes niche.

[The Chair]

Order. I am afraid that brings us to the end of the time allocated for the Committee to ask questions of this witness. On behalf of the Committee, I thank our witness.

--- Later in debate ---

[Emma Hardy]

Q You mentioned before the letter and the number of people supporting the “have regard” to financial inclusion. I wonder whether it is worth sharing with colleagues who the people who support the “have regard” to financial inclusion are, and whether they elaborate on the reasons why they have supported that. Even though you are a wonderful spokesman, it is not just you supporting it, is it?

Martin Coppack: No. We have Martin Lewis on board, for example. That might surprise some people. We have Andy Briggs, chief executive of Phoenix Group. We have Lord Holmes of Richmond, from the House of Lords. We have the Legal & General Group chief executive. That is as well as other organisations that you might expect, such as Citizens Advice. There are about 70. This is not a niche area. People see it and see the need for it. It is not just Fair by Design.

[Martin Docherty-Hughes]

Q I think both of you will agree with what I am about to ask you. Would you agree that those most in favour of a cashless society are those with the most money in their bank?

Natalie Ceeney: Yes.

[Martin Docherty-Hughes]

Q If you look at other countries that are far more digitally enabled than the UK and Northern Ireland, notably Estonia—let me declare a non-pecuniary interest as the chair of that all-party parliamentary group—the vast majority of Estonians, who do have more or less a cashless society, believe that a cashless society or access to cash, should I say, needs to be supported with the infrastructure that you mentioned earlier, Natalie.

Natalie Ceeney: I think that is absolutely true. One thing I would say, perhaps to connect to the points that Martin has made, is, “Wouldn’t it be nice if everybody could participate in a digital society?” There is a risk that we talk about protecting cash for its own end. The reason why we are talking about protecting cash is that the most vulnerable need it, because it works better for them than digital.

We also, in parallel, need to work to a society where everyone is included in a digital economy. If you are dependent on cash, you shop locally; you cannot shop online. That means that you pay more for your goods and services. You cannot do direct debits. You probably have a prepayment meter. Actually, your costs of living, if you live on cash, are much higher. But the people who use cash are not stupid. They are not doing it because they have not worked that out; they are doing it because they have not got a choice, so I think that in parallel—this is not covered by this Bill, but it should be something that we collectively work on post the Bill—we need to work on how we include everyone in a digital society.

That is broader than financial services. In Britain, 4.5 million people do not have any kind of smartphone; 1.5 million people do not have any broadband or mobile connectivity; and 1.3 million people do not have a bank account. There are some bigger societal issues to tackle, but we have to really make sure that this is an inclusion debate.

[The Chair]

I think this will be the last question, asked by Stephen Hammond.

--- Later in debate ---

[Andrew Griffith]

Q Do you think this is a good example of an area where it is important that the Government have an intervention power? We have seen some patterns of behaviour emerge very rapidly and cause significant public policy concern.

Mike Haley: Yes, I think we have seen in the past that regulators have not moved quick enough when there has been widespread harm. We might look at payment protection insurance, for example, where consumers brought plenty of reports into MPs’ and Government in-trays, and yet the regulator was rather slow in intervening in a market—a market that had been abused. I think that an intervention power could be very powerful.

[Martin Docherty-Hughes]

Q In terms of clauses 21 and 22 on digital settlement assets, how effective do you think the Bill will be in ensuring that we reduce fraud with digital settlement assets that use blockchain? I am not having a go at the technology, because that is a completely different discussion. How effectively will an open or closed blockchain, and the differences between the two, be regulated by this Bill?

Mike Haley: I think one of the problems of all legislation is how quickly it keeps up with changes in technology, and it being broad around principles. As I mentioned, with the authorisation of anyone who becomes a regulated entity dealing with digital settlement assets, it is important to have clear criteria for the onboarding—know your customer—and to know who the accounts are opened by. I find that already we are looking at money laundering through coin swap services, for which you do not need an account and may not be under this regulation. There are cross-chain bridges, where someone can move from one blockchain to another. I am not an expert on whether clauses 21 and 22 cover some of those services that have been created, which were probably not in the thinking when the Bill was starting to be drafted.

[Martin Docherty-Hughes]

Q My concern is that blockchain has been around for a long time. Fraud is not new—there is nothing new under the sun. Do you have a concern about the ability of the regulators to keep on top of this, as they do not have the knowledge that they should have, nor do they have the access to resources to develop it?

Mike Haley: There are a number of questions there. One is whether the legislation is broad enough to ensure that the regulator can act on some of those services. They need to be included in the perimeter. I do not think that some of these services—I talk about those coin swap services—are actually in the purview. There are cryptoassets and cryptocurrency exchanges, but some of these other services have been created, and from my reading of those provisions, I do not think they are covered.

[The Chair]

Order. I am afraid that brings us to the end of the time allotted for the Committee to ask questions. I thank our witness on behalf of the Committee.

Examination of Witness

Adam Jackson gave evidence

--- Later in debate ---

[Tulip Siddiq]

Q You have touched on this very briefly. I would like you to expand a bit more on the comparison between our approach and the EU’s approach to crypto regulation in general. You will be aware of the EU’s regulation deal, which effectively brings together cryptoassets and activity into regulations, whereas we, at the moment, are limited to stablecoins. Are we at some sort of risk of falling behind because we have not had that sort of regulation? Does it compromise our competitiveness in the fintech sector because we have not had that sort of regulation deal?

The other thing I wanted to ask about is investment in the UK fintech industry, which was down to £9.6 billion in the first six months of this year, which is three times less than exactly the same period last year. Do you want to comment on the reason for that decline? What should we be doing as politicians to try and help with that?

Adam Jackson: Taking your first question, it is worth looking at the EU MiCA regulation and possibly the approach of a territory such as Singapore. It links a bit to the investment. We did some analysis of investment in just crypto alone, looking at that as a vertical within fintech, and again, the UK has always been the second location for crypto investment in the world, after the US, until the first half of this year, when we fell behind to Singapore. That might be a blip, but when you then look at regulatory mapping, you will see that Singapore possibly has the most forward regulatory system, particularly for stablecoin. The EU has a very comprehensive approach, but is has not come into force yet. Singapore has an established system, so I think that shows that if you get it right and have a proportionate regime, you attract the industry and the investment.

Is the EU approach right? There are strong arguments to say that it is possibly too comprehensive, and we come back to the notion that trying to find something that works for all 27 does not fit our circumstances. The UK is right to take a more iterative approach. We obviously have a common law approach as well, which means there are certain things we can do through case law. It is absolutely right that we are focusing on stablecoin and that is where some of the biggest volatility in the market was this year. The Bill addresses that, which will be really important in providing confidence for consumers and, critically, for investors in technology firms in that space.

The EU rule applies to not just stablecoin but cryptocurrencies more generally and exchanges, so should we also have a regulatory regime for other cryptoassets? I think the answer is yes. The question is how it fits within the Bill. The Government have said that they will introduce proposals for wider regulation of other cryptoassets. We expect something at some point, possibly soon.

That begs the question whether the Bill already enables the introduction of regulations. We probably need to ask Treasury counsel about the definition of a digital settlement asset. The Bill allows for the definition to be changed. Do the rules enable it to cover other cryptoassets? If it does, the powers are there to enable regulators to introduce systems subject to the proposals. If not, will we have to wait another 20 years before regulators are given the powers to regulate cryptoassets?

On cryptoassets, the important things that our members, including exchanges and cryptoasset firms, emphasise are an authorisations regime, a set of rules for initial coin offering—essentially, clear guidance on what information should be provided to consumers about individual assets—and custody. The Bill provides for applying rules on custody for stablecoin. If we do not have a parallel system, we will start to see some question marks over why those custody rules do not apply to cryptoassets as well.

On investment, there are different ways of looking at the figures from the first half of this year. Some investment, particularly VC, has really held up, but we know that globally we can expect a fall in investment, and we are just starting to see that trickle through. It is therefore a question of how the UK holds up against other countries. We might even see more mergers and acquisitions. At the moment, the pound makes the UK a nice place to come to buy fintech firms, so there may be a bit of difference there. It comes back to maintaining that competitiveness. Our members tell us that the most important thing is to get the Bill through. It provides important powers. If we can strengthen it in some of the areas that I mentioned to the Minister, that is also critical.

The other thing that I would flag is that there are two other pieces of legislation that are either before the House or slightly in limbo. They are also important for the competitiveness of fintech. One is the Data Protection and Digital Information Bill, introducing digital ID and open data, which will really transform the open banking we have into open finance. Australia already has that, so there is a risk of us falling behind. That Bill is also really important.

We have heard a lot about fraud. The provisions in the Online Safety Bill around making the places where frauds are advertised—the social media platforms and search engines—responsible for fraud, as well as requiring banks to reimburse, are critical. That is starting to be a factor in investment decisions. Whatever happens to that Bill, ensuring that those provisions are introduced as soon as possible is key.

[Martin Docherty-Hughes]

Q Mr Jackson, you said earlier that Singapore had forward regulation. Some of us on the Committee might see that as meaning that it is less robust than what the EU is proposing. I have heard Singapore and offshore tax havens used as some kind of comparator for UK regulation. Do you think that it is useful for us to use, say, Singapore—a one-party state, effectively—and offshore tax havens as a comparator for good regulation?

Adam Jackson: I was not suggesting that we should necessarily compare the exact regulatory regime—the economy is a very different size—but I would take the wider point that a territory that has been seen to introduce some regulatory rules, as opposed to having none, is seeing increased investment.

The other place to look is the US. I was in Washington last month talking to policymakers, and the area where there is most likely to be a bipartisan Bill next year is regulating stablecoin. In terms of our international competitiveness, others are moving, and the Bill enables the UK to keep up.

[The Chair]

I am afraid that brings us to the end of the time allotted for the Committee to ask questions. I thank our witness on behalf of the Committee.

Examination of Witness

Martin Taylor gave evidence.