Bank of England Starts Discussion on the Future of Money

The Bank of England (the Bank) has launched a Discussion Paper on its approach to innovations in payments. In the Foreword, the Bank's Governor, Andrew Bailey, positions the paper as "the start of a conversation" about the Bank's planning for new forms of digital money. These range from a central bank digital currency – colloquially described as the "digital pound" – to tokenised bank deposits and crypto-based stablecoins.

As the issuer of sterling and the guardian of UK monetary policy, the Bank recognises that market changes bring both opportunities and challenges. The spread of distributed ledger technology (DLT) has created new ways of recording and transferring value, outside of traditional bank accounts. Novel payment services have the potential to reduce financial exclusion and costs. At the same time, there is a danger that the rapid adoption of new forms of digital cash could weaken the Bank's influence over the monetary system and allow destabilising events to occur. The collapse of Silicon Valley Bank in 2023 served as a reminder that there isn't a complete firewall between innovative business arrangements and the traditional banking sector.

With these considerations in mind, the Bank has been working to develop the infrastructure to support new technologies while limiting the risks that their unregulated spread could promote. In the Discussion Paper, the Bank point to several areas where they have projects underway or are considering changes. These include the following:

• Real-Time Gross Settlement System (RTGS): The Bank is undertaking a refresh of the RTGS service, which allows banks and other authorised participants to transfer funds between their accounts with the Bank. The RTGS system reduces counterparty risks by allowing settlement in central bank money. Changes have been made to facilitate omnibus accounts, and further enhancements are possible.
• Digital Securities Sandbox (DSS): The Bank is taking part in a scheme which allows operators of financial market infrastructure to match and settle transactions in securities using DLT. The intention is to allow existing FMIs and new entrants to implement new models, despite the limitations imposed by legislation based on traditional book-entry systems.
• Tokenised Deposits: The Prudential Regulatory Authority has set out for the banks it supervises its expectations for the governance of new products, representing transferable (ie, tokenised) bank deposits.
• Stablecoins: The Bank has created a set of rules to facilitate the supervision of stablecoins used for payments in the UK. Although the most common use-case for stablecoins is to settle transactions in cryptoassets, the Bank has recognised the possibility for them to be used as alternatives to other forms of money.
• Digital Pound: The Bank is exploring the potential for a digital pound, which could co-exist with other forms of money.
• Wholesale CBDC: As a possible alternative to the RTGS or addition to its functionality, the Bank is considering whether a wholesale version of the digital pound – available only to banks and other authorised persons – should be introduced.

The Bank's Discussion Paper is very welcome – both as a summary on its current innovation work and as a forward-looking call for input. The UK payments system is ripe for renovation. Moreover, it is impossible to ignore the international connections of the payments system and the spread of new technologies. As Andrew Bailey points out, the Discussion Paper is not the last word on the subject but the beginning of a conversation. It is vital to the ability of the UK to maintain the strength of its currency, its credibility as a financial centre, and its attractiveness for innovators that this discussion takes place.

The Bank's consultation on the Discussion Paper closes on 31 October 2024.