Bank of England Embraces Innovative Payments With CBDC, DLT and Tokenization
Stablecoins present "significant financial stability risk."
Kudos to the Bank of England (BoE) for its candor and embrace of innovation in this bold policy paper, which lays out its research interests and tells other central banks to “engage and prepare.”
The BOE then goes on to highlight everything hot in the payment space, from QR codes to distributed ledger technology (DLT), tokenization, stablecoins, and, of course, CBDCs!
How can you not love the BoE for positioning itself to put innovation to work? They’re brave, and their stance is fitting for the times we live in. Compare it to the US Federal Reserve, which is in a coma by comparison.
The BoE’s innovation agenda didn’t develop in a vacuum it is scared to death of losing control of money due to crypto and admits it:
🔥”If central bank money was unable to interact with new technologies, there could be a risk of settlement activity moving away from central bank money to private settlement assets [crypto and stablecoins] that could interact with them. This outcome could weaken financial stability.”🔥
Whether you love or hate cryptocurrencies, we owe them all a debt of gratitude as they are the ones who are pushing the BoE to innovate!
👉TAKEAWAYS
🔹 The Bank has a low risk appetite for a significant shift away from settlement in central bank money towards private settlement assets.
🔹 BoE really doesn’t like stablecoins: The Bank’s initial analysis also notes that there are significant financial stability risks from the use of stablecoins for wholesale transactions.
🔹 New life for Existing RTGS: The BoE is working on extending RTGS settlement hours and allowing RTGS to connect to external ledgers, including those based on programmable platforms, and settle assets in central bank money.
🔹 Tokens and programmability: Central bank money could interact with programmable platforms through the use of so-called ‘wholesale central bank digital currency’ (wCBDC) technologies.
🔹 Good news for blockchain: The Bank judges that the use of programmable platforms may bring significant benefits in the functioning of wholesale financial markets, amongst others.
🔹 No crypto: The BoE is responsible for the overall stability of the financial system…..and the provider of the sole risk-free asset that gives effect to settlement for payments.
🔹 No crypto: “We seek a payments landscape which maintains the singleness of money and promotes sustained innovation.”
🔹 More tough love for stablecoins: The Bank issued a discussion paper in November 2023 proposing a regulatory regime for the use of stablecoins in systemic payment systems.
“Distributed Ledger Technology (DLT) could enable participants to maintain timely and secure transaction records on a shared, programmable ledger without needing to defer to, or rely on, other participants or ledgers. This could reduce frictions and inefficiencies by removing some of the need for buyers and sellers to carry out both post-trade events such as the payment of coupons and manual reconciliation.”
👊STRAIGHT TALK👊
I believe in giving credit where it is due, and the BoE is dishing out innovation at scale.
What’s not to love? Well, there’s plenty if you’re in the stablecoin business.
The BoE has proposed the toughest stablecoin regulations anyone has ever seen! It is also clear that it sees tremendous risk in using stablecoins in settlement so don’t look for stablecoins integrated in UK banking or settlements anytime soon!
Similarly, crypto is clearly not in the BoE’s good graces. But you expected that!
While I focused on the paper's innovation aspects, a key section asks for feedback on its coming wholesale CBDC trial.
The BoE already ran Project Meridian with the BIS and is now on Project Meridian FX with the ECB. Both projects fuse DLT smart contracts with existing RTGS systems.
The next step will likely be comparing the advantages of a wCBDC with these upgraded RTGS systems.
The BoE is clear that it runs the monetary system in the UK and won’t brook competition.
Many won’t like that message, but at least the BoE is earning its place through modernization.
For more on the BoE’s CBDC and tough stablecoin rules read these:
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Thanks for the article. What are RTGs?