Bank of England Governor urges banks to progress tokenized bank deposits

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Source: Ledger Insights

On Monday, the Governor of the Bank of England (BoE), Andrew Bailey, delivered a speech on the future prospects for money, diving into the potential of new forms of digital currency. Mr. Bailey wants to preserve the status quo between financial institutions and the central bank, but he also wants to encourage banks to spur greater innovation, particularly around tokenized deposits. The BoE sees a need to protect the foundations of safe money as the economy goes digital, but not only with a central bank digital currency (CBDC).

The future of “enhanced digital money”

In his speech, Mr. Bailey referred to two basic foundations of money “on which the economy depends and in which the public can trust.” One is the singleness principle referring to the concept that all money has the same value. The other is settlement finality. In other words, once we pay for something, the transaction concludes.

However, the Governor believes that current tech developments threaten to put safe money at risk. He says stablecoins generally fail the basic singleness and settlement finality tests and that what we need is a new form of “enhanced digital money” able to incorporate new features, such as the programmability of smart contracts, while preserving its intrinsic safety and confidence. This will be particularly important in the case of a retail CBDC or digital pound.

But should central banks be the only ones to lead this campaign? Mr. Bailey says not quite. In the UK, commercial bank money represents 85% of payments made by the public, and the Governor says the BoE has no intention of shifting this mix when it comes to digital currencies. However, he calls on banks to take action to ensure that continues to be the case.

“We want to encourage more thinking and action in the world of enhanced digital bank deposits – sometimes called tokenized deposits,” Mr. Bailey said. “So, yes, this is a call to action particularly to banks – don’t leave central banks as the only show in town. That’s not what we want.”

Central bank money vs wholesale CBDC

When discussing wholesale use cases, the Governor spoke about central bank money rather than a wholesale CBDC

The BoE has been closely involved in overseeing the launch of Fnality, an institutional distributed ledger technology (DLT) platform using a synthetic wholesale CBDC, in which banks deposit money in a central bank omnibus (shared) account, which is tokenized. The Governor also spoke about the potential of its renewed real-time gross settlement (RTGS) which is designed to be able to support integration with third party DLT systems.

Meanwhile, last week the banking trade body UK Finance asked the government to explore whether there’s industry appetite for a shared infrastructure to support CBDC and deposit tokens to settle digital assets.

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