Aamer Sarfraz: Other countries have started work on digital currencies. It’s time the UK got going too.

13 Apr

Lord Sarfraz is a Conservative member of the House of Lords and a Member of the Science and Technology Committee.

Today in the House of Lords, I will be speaking about a digital pound. Specifically, on this occasion, I will be asking the Government what assessment it has made of a UK Central Bank Digital Currency (CBDC).

There is already much thinking that has already gone into this. The Bank of England’s CBDC discussion paper, published last year, started the ball rolling for a digital pound.

A digital pound, backed by the Bank of England, could be a major win for individuals and businesses. With a digital pound, held in an electronic wallet, many bank fees could be eliminated, and foreign currency exchange risks substantially reduced. Importantly, such a currency could compete with Bitcoin’s market share, which currently stands at approximately US$1 trillion. It is estimated by the FCA that 1.9 million adults in the UK already own cryptocurrencies, and this number is growing.

A successful digital pound will need to be built with the right technology. The Bank of England has several options, including using a decentralised distributed ledger, like other cryptocurrencies. However, the very principle of “decentralisation” will not come naturally to any “central” bank. Most importantly, central banks will need to work with each to ensure their various CBDC’s operate on the same technology standards. Otherwise, we will have the same problem we have with fiat – a pound note doesn’t fit in a US vending machine.

Other countries are already forging ahead with plans for a digital currency. Japan’s Central Bank has launched a one-year digital currency trial this year. Furthermore, this week the Chinese government has officially started to issue digital yuan to 750,000 recipients. Other central banks around the world are also experimenting with digital currencies of their own. There are already several GBP-pegged stablecoins in the market. We now need to pick up the pace on a Bank of England issued digital currency.

Alongside issues of supply, there is clear demand for stable digital currencies. Tether, a stablecoin pegged to the US dollar, already has a US$45 billion market cap. However, CBDC’s will not mark the end of Bitcoin, nor should that be our objective. Bitcoin will still be the “people’s digital currency”, uninfluenced by central banks or governments. Without the success of Bitcoin, we would never have been thinking about a digital pound in the first place.

The rationale for the emergence of a digital pound is that the current banking system has several drawbacks. Over the past few decades, commercial banks have diversified their revenue sources.  As a result, “non-interest income”, mostly in the form of bank fees, have become an important source of income. Bank fees are charged on all sorts of things – account maintenance, overdrafts, cashier checks, reference letters, returned cheques, and wire transfers to name a few. There are entire online comparison sites helping consumers navigate bank fees.

Individuals making or receiving overseas payments, and those travelling overseas for both business and pleasure, get hit especially hard. They are faced with foreign currency losses (often twice during a trip – on departure and return), foreign ATM fees, traveller’s cheques issuance fees, fees for sending or receiving money, and fees for overseas transactions. Similarly, businesses that are buying and selling overseas, have to manage foreign currency risks and pay substantial transaction fees.

While some challenger banks are doing a good job reducing transaction fees, many still earn considerable non-interest income. They would say, quite rightly, that regulatory and compliance costs have skyrocketed, which result in the need to find additional sources of revenue.

A digital pound could be even more powerful when combined with smart contracts. Take the example of trade finance. In today’s archaic system, international trade is entirely dependent on banks, without whom costly letters of credit – the principal instrument in import and export – cannot be opened. Letters of credit were used by the Medici Bank in the 14th century, and are still in use today.  A smart contract, programmed into a digital wallet, could mean importers and exporters could use their digital pounds to conduct trade without banks.

Any solution afforded by the emergency of a digital currency would be part of the UK’s burgeoning fintech sector. The UK has already established a strong fintech sector and it could become even stronger. It has built on the UK’s historic strengths in financial services, which contributes an estimated £132 billion to the UK economy, corresponding to 6.9 per cent of the economy. The UK’s fintech market generates over £11 billion in annual revenues, and claims 10 per cent of market share globally. It is no surprise that 71 per cent of all British people interact with at least one fintech, which is higher than the global average of 64 per cent.

The Kalifa review reported in late February proposed five key recommendations. One of those was focused on creating a new regulatory framework for emerging technology, and this would include virtual currencies. The report’s author explained: “Fintech is not a niche within financial services. Nor is it a sub-sector. It is a permanent, technological revolution, that is changing the way we do finance.”

Fintech has already brought benefits for people in everyday life, and the UK has become a particularly strong hub for its development. Looking ahead, a digital pound could bring benefits for both consumers and businesses and the UK must move faster in exploring the mechanics and regulatory system of such an innovation.

Joel Gladwin: International rivals are catching up on the UK’s fintech success. Here’s how we can defend our crown.

27 Nov

Joel Gladwin is Head of Policy at the Coalition for a Digital Economy (Coadec).

Our fintech sector is a great British success story. Investment into UK fintech companies is at record highs, accounting for over a third of all investment into the sector in Europe. Last year, London had more people working in fintech and a greater number of venture capital investment deals than any other city in the world.

Companies like Monzo, Starling, Revolut and TransferWise are all less than 10 years old but they have matured into global brands in their own right. They have also grown into formidable rivals for customers and their cash, putting pressure on the rest of the financial services sector to step outside its comfort zone, innovate rapidly and embrace a fail-fast, customer-centric culture.

Our historic strength in financial services, combined with forward-thinking regulators in the Financial Conduct Authority (FCA) and pro-competition policy in the form of open banking, have all contributed to establishing London as the fintech capital of the world.

But that is enough backslapping for now.

Not only are our international rivals catching up when it comes to the volume of fintech deals, they are also drawing up plans to open up more financial – as well as non-financial – data for their fintechs to access and innovate. These plans go well beyond the limited scope of our own open banking regime. The key to defending our fintech crown will be building on this momentum.

Thankfully, the Government is already starting to think seriously about what comes next, with the Treasury and the FCA embarking upon a number of reviews this year including on payments regulations, open finance and the broader UK fintech sector.

Moving beyond open banking to open finance is the next logical step for our fintech sector’s growth and development. It will open up the savings, credit, mortgages and pensions sectors for innovation – and, ultimately, bring consumers more choice, convenience, and ease when it comes to managing their finances.

In its latest Digital Finance Strategy the EU has committed to establishing an open finance framework by 2024. As someone who was involved in the lobbying battles of getting PSD2 over the line – the EU regulation that made open banking possible – I know full well that this is an extremely ambitious target by European standards.

After all, the bureaucratic wranglings of Brussels led PSD2 to be an extremely lengthy project. It spanned five years (2013 to 2018), one directive, eight guidelines, six technical standards and seven opinions. And it has still not been delivered in parts of Europe to this very day. The UK’s approach towards a functional open finance ecosystem can now be quicker, leaner and more agile.

By returning to our principles based approach to regulation, rather than overly prescriptive technical standards, and enabling the market of AP specialists to get on and build the connections for open finance from below, new research by The Coalition for a Digital Economy (Coadec) suggests that it would be possible to unlock the benefits of open in two years.

This isn’t a novel idea either. It has been the approach taken by the Australian Government which has introduced arguably the most expansive open data regulatory initiative in the world.

The Australian Consumer Data Right (CDR) will give consumers the right to access not only their financial data but also utility and telecom data by 2021, even though they started on their journey two years later than us. A market-led, principles-based regulatory framework will allow the UK to deliver open finance much quicker than our near neighbours.

The Chancellor has also made it clear that he will “review our regulatory framework on financial services” and that “not being inside the EU more generally gives us a chance to do things differently.” One area that desperately needs the Treasury’s attention is the innovation-killing, anti-competitive, EU regulation that forces customers to re-authenticate third party access with their bank every 90 days – known as Secure Customer Authentication (SCA).

Imagine having to send your accountant, bookkeeper or financial adviser a new letter of authority every 90 days just so they can continue to work on your behalf. The chances of forgetting to do so would be high – potentially missing filing deadlines, payroll or important insights on your financial health. But this is precisely the situation that customers of accountancy software and financial adviser platforms face.

As a result, fintechs are forced to endure customer attrition rates between 13 per cent and 65 per cent according to industry data, rates which are not viable for any business at either end of the spectrum. This is made even worse by this process being managed by the very same banks for which open banking measures were introduced to provide competition. There is little incentive for them to get this right.

These barriers have thwarted open banking’s potential to add $1.4 billion to the UK’s GDP on an annual basis, according to analysis from the Centre for Economics & Business Research. It is vital that we address them.

The UK’s regulatory influence on the global stage will endure. Informal channels, networks and knowledge communities have always played a critical role in shaping the content and application of policy frameworks, especially in areas where technological progress necessitates new approaches such as fintech. By moving quickly to embrace an open finance environment, and correcting the deficiencies within existing European regulation, the UK can continue to lead on fintech.