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The Governor of the Bank of England (BoE), Andrew Bailey, has dropped further hints that the United Kingdom central bank could be edging towards a digital pound for both wholesale and retail payments during an October 26 speech.
Speaking at the Group of Thirty’s 39th Annual International Banking Seminar, Bailey emphasized the need to modernize payment systems, particularly cross-border and wholesale payments, by harnessing digital technology.
“Harnessing digital technology to improve strikes me as having real potential, say in areas like solving late payment for firms by enabling automatic release of funds when goods are delivered and more widely using encryption technology to prevent fraud,” said Bailey.
He added that “to do otherwise would risk a failure of imagination.”
The BoE Governor argued that the role of a central bank digital currency (CBDC) is vital for wholesale high-value payments and the settlement of payment systems.
A wholesale CBDC, or wCBDC, is a digital version of a country’s currency used by banks and financial institutions for large-scale transactions and settlements; this is in contrast to a retail CBDC, or rCBDC, which is a form of central bank digital currency used by the general public.
In July, the BoE published a discussion paper on wholesale money, highlighting likely trials for both wholesale CBDC and a real-time gross payment (RTGS)—a funds transfer system that allows for the instantaneous transfer of money and/or securities—”synchronization” solution.
For retail payments, Bailey suggested that the BoE should be indifferent to whether payments use a rCBDC or commercial bank money.
Despite this supposed indifference, the BoE Governor noted that the preferred option would be for most retail payments to remain in commercial bank money. He maintains that “commercial banks use their money to extend credit directly, whereas central banks do not. So, changing the mix would at best complicate the credit system.”
Regarding digital innovation such as tokenized deposits—something on which the BoE has also been encouraging discussion since July—Bailey argued that commercial banks are “the best home for such innovation.”
However, he added the caveat that “if for some reason innovation is unlikely to happen, then the central banks have to decide whether they are the only game in town. For me, this justifies why we must continue to prepare for retail CBDC. We have not yet seen enough evidence that the innovation will happen in commercial banks.”
This, said Bailey, is not his preferred outcome, which is why the BoE encourages private-sector innovation.
BoE dabbles in CBDC
The U.K.’s central bank has been exploring CBDCs for some time as it seeks to update its RTGS system.
In its July discussion paper, titled “The Bank of England’s Approach to Innovation in Money and Payments,” the BoE promised to undertake a series of experiments within the next six months to examine wCBDC settlement compared to the “synchronization” of non-CBDC central bank money using the existing RTGS system.
Synchronization enables ‘atomic settlement,’ which means linking the transfer of two assets so that one asset moves if and only if the other asset moves. Both synchronization and wCBDC depend on distributed ledger technology (DLT), a system that records transactions across multiple computers or locations.
One of these proposed solutions would replace the U.K.’s current RTGS system, the Clearing House Automated Payment System (CHAPS), operated by the BoE and used for high-value transactions. The BoE has been consulting on an update to CHAPS since 2022.
The increasing global interest in CBDCs, with 25 countries already piloting a wCBDC, has further encouraged the BoE to seriously consider it as an alternative to CHAPS.
In its July 30 discussion paper, the BoE argued that more work is required to consider the respective roles these innovations might play in the Bank’s future toolkit. To inform this work, the Bank proposed a program of experiments to test the use cases.
It outlined five experiments, three of which would test delivery-versus-payment (DvP) transactions with securities, where delivery of the assets is conditional on the transfer of funds; one experiment with foreign exchange payment-versus-payment (PvP) transactions, where settlement is conditional on the presence of payments in both currencies; and lastly, an experiment using assets and multiple currencies on a single platform.
The BoE has yet to reveal the outcome of this experiment, but Governor Bailey’s recent comments and the bank’s continued interest in a wCBDC could indicate how it is leaning.
Watch: Finding ways to use CBDC outside of digital currencies