The Bank of England has published a discussion paper entitled “The Bank of England’s Approach to Innovation in Money and Payments,” which outlines its strategy for adapting to technological changes in the financial landscape. This paper addresses the opportunities and risks associated with innovations in money and payments, aiming to maintain trust and confidence in the value of money.
The Bank of England emphasises the importance of understanding and preparing for these innovations to meet its monetary and financial stability objectives. The discussion paper seeks to engage a wide range of stakeholders, including other central banks, policymakers, and industry participants, to gather input on several critical issues.
Key principles guiding the Bank’s approach to innovation include being prepared for rapidly evolving markets and activities, which may outpace the ability of policymakers to respond. The Bank acknowledges the necessity of remaining agile and responsive to changes in an uncertain landscape.
The discussion paper highlights several innovations in the payments landscape. For instance, countries like Sweden, Brazil, and India have adopted interbank payment systems alongside traditional card payments, allowing transactions via mobile phone numbers or QR codes. Additionally, programmable platforms, such as those based on Distributed Ledger Technology (DLT), enable the creation of shared ledgers that can be updated simultaneously across all parties in a financial transaction, potentially reducing inefficiencies.
The Bank of England has already undertaken several initiatives in response to these innovations. It has enhanced its capability to supply wholesale central bank money for settlement through a multi-year programme to renew the Real-Time Gross Settlement (RTGS) service. This includes the introduction of Omnibus Accounts, which facilitate settlement backed by central bank money for tokenised asset transactions.
Looking forward, the Bank’s proposed approach considers the entire payments landscape, encompassing retail and wholesale payments, central bank and privately issued money, and both domestic and international contexts. The Bank aims to ensure a ‘safe innovation’ regulatory environment for the development of tokenised assets through its Digital Securities Sandbox, established in partnership with the Financial Conduct Authority (FCA).
The Bank also explores the potential issuance of a retail central bank digital currency (CBDC), a digital form of a banknote, which would coexist with cash rather than replace it. A retail CBDC aims to ensure central bank money remains relevant in an increasingly digital economy, providing a public platform for private-sector innovation and promoting competition and efficiency in payments.
To maintain financial stability, the Bank is cautious about a significant shift from central bank money to private settlement assets. The discussion paper outlines the Bank’s exploration of options to enhance access to settlement in central bank money, including the potential use of wholesale central bank digital currency (wCBDC) technologies.
The Bank is also working closely with industry to design functionalities for the future RTGS service, such as extended settlement hours and a synchronisation interface connecting RTGS to external ledgers, including programmable platforms. This collaboration aims to support industry innovation and maintain the singleness of money.
The Bank of England seeks feedback on the discussion paper by 31 October 2024, inviting views on various aspects of programmable platforms, private money innovation, and potential functionalities of a wCBDC. Responses can be submitted via email to PaymentsInnovationDP@bankofengland.co.uk.
This initiative represents the Bank of England’s commitment to fostering a resilient and innovative payments landscape while ensuring the stability and confidence in the financial system. Click here to download the full paper.
