The Bank of England has announced that it will conduct a series of experiments with distributed ledger technology and wholesale central bank digital currencies (CBDCs) to assess their impact on the changing payments environment.
This move aims to address rapid developments in money and payment technologies, as outlined in a recent discussion paper by Governor Andrew Bailey.
The Bank of England’s approach to innovation in money and payments
The Document entitled “The Bank of England’s approach to innovation in money and payments” highlights that innovation in money and payments, including distributed ledger technology and tokenisation, brings both opportunities and risks. In his remarks, Bailey emphasised that these innovations are inextricably linked to the objectives pursued by central banks. He stated: “Understanding these innovations, preparing for them and supporting their safe adoption is critical to our objectives.”
Unlike retail CBDCs, which are intended for the general public, wholesale CBDCs are digital versions of the national currency intended exclusively for financial institutions. These digital currencies are designed to streamline transactions between banks and other financial institutions, improving both the speed and security of high-volume transactions and settlements.
The central bank recognises the challenge of interoperability, which means that different jurisdictions can develop new systems that may not work effectively together. To address this issue, the Bank of England wants to develop a “synchronisation interface”. This tool would allow an asset to be transferred from one party to another on an external platform, with the cash portion of the transaction taking place on the real-time gross settlement platform.
Various use cases are planned
To maintain its position in the global central banking arena, the Bank of England plans to test various use cases, functionalities and designs for wholesale CBDCs and their synchronization.
While no specific timelines for these experiments have been announced, the bank is inviting the public to provide feedback on its proposed approach. Feedback can be submitted until the end of October.
In June, the Bank for International Settlements (BIS) published a report showing that the vast majority of central banks worldwide do not plan to issue retail CBDCs in the medium term, with only 12% of respondents saying they would consider doing so. The BIS report also found that there is a greater likelihood of wholesale CBDCs being issued within the next six years, with the possibility that there could be nine such currencies in circulation by “the end of this decade.”
