In a recent speech, Andrew Bailey, the Governor of the Bank of England, emphasized the critical role of central bank money in both wholesale and retail payment systems. He highlighted that central bank money is particularly vital for facilitating high-value wholesale payments and settling payment systems, prompting the Bank to foster digital innovation in this sector.
In July, the Bank published a discussion paper focusing on wholesale money, which outlined prospective trials for both wholesale Central Bank Digital Currency (CBDC) and a Real-Time Gross Settlement (RTGS) synchronization solution.
Indifference Towards Retail Payments
When it comes to retail payments, Governor Bailey expressed a preference for maintaining the current system, where most transactions utilize commercial bank money. He believes this approach does not disrupt fractional reserve banking or the overall availability of credit within the economy. According to him, digital innovations, such as tokenized deposits, should primarily occur within commercial banks.
However, Bailey cautioned that if innovation within the banking sector falters, central banks might need to step in as the primary providers of payment solutions. “If for some reason innovation is unlikely to happen, then 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 innovation will occur in commercial banks,” he stated.
Challenges in Financial Innovation
Bailey acknowledged that historical instances have shown that certain infrastructures and technologies can fail to drive innovation. This often stems from market power concentration, reinforcing the need for ongoing exploration of CBDC as an alternative solution. “That is not my preferred outcome, but it is one that we should not rule out,” he remarked.
Trials for Tokenized Deposits
Currently, the UK banking industry is investigating tokenized deposits as part of its Regulated Liability Network. In September, the sector announced its intention to engage further with regulators regarding these innovations.
Bailey’s comments signal urgency and are not new; in April, Deputy Governor Sarah Breeden outlined potential scenarios where bank innovation might lag, become unsuccessful, or remain fragmented. While fragmentation has been a challenge in the realm of digital securities, the situation with tokenized deposits appears somewhat different. Some banks offer tokenized deposits solely for their own clients, whereas numerous multi-bank initiatives are also in progress.
Ledger Insights Research has identified over 70 tokenized deposit, stablecoin, and distributed ledger technology (DLT) payment projects. Notably, at least 18 of these initiatives are multi-bank projects, excluding cross-border payment ventures.
