A changing landscape: Bank of England’s approach to innovation in money and payments

Against the backdrop of a rapidly evolving payments landscape, the Bank of England has launched a discussion paper on how it should address the opportunities and risks stemming from innovations in money and payments.

Looking back

The Bank’s recent policy work in response to payments innovation has included:

• progressing its retail central bank digital currency project to the second phase, following a 2023 consultation,
• determining its approach to new forms of private digital money, such as tokenised deposits and stablecoins,
• teaming up with the FCA to develop the UK Digital Securities Sandbox, the UK’s first sandbox for financial market infrastructure, and
• renewing its Real Time Gross Settlement (RTGS) systems.

The way forward

The Bank’s proposed approach to addressing technological advances in finance considers several areas of interest, including:

• Striking a balance between public and private money: Although both forms of money contribute to supporting efficient and competitive financial markets, the Bank explains that it has a low risk appetite for a significant shift away from settlement in central bank money towards private settlement assets. The Bank is exploring ways to expand access to central bank money as a settlement asset for a wider range of participants by lowering the current threshold.
• Regulating stablecoins: The Bank considers that there are significant financial stability risks from the use of stablecoins for wholesale transactions. It believes that the holding limits proposed for its retail regime will curb the wholesale use of stablecoins at systemic scale.
• Getting ready for DLT uptake: The Bank recognises the benefits of programmable platforms, including those based on DLT, which could increase efficiency and enhance financial stability. To keep pace with technological advancements, it is exploring ways in which central bank money can interact with DLT platforms, such as synchronisation and wholesale CBDC technologies.
• Exploring innovations in central bank money…: The Bank proposes a programme of experiments aimed at testing innovations in wholesale central bank money and seeks input on an initial set of indicative use cases. These experiments could build on existing work like Project Meridian and Project Agora under which some central banks have tried out settlement synchronisation and exchanging tokenised deposits.
• …and retail payments: The Bank acknowledges the series of changes that have impacted retail payments in recent years and underscores the importance of keeping UK’s retail payments ecosystem fit for purpose. The Bank pledges to work with regulators to achieve a set of four policy outcomes, which are particularly relevant to the future of the UK’s interbank retail payments systems. This includes ensuring that infrastructure providers have sustainable and coherent funding and revenue models to ensure they can invest in their resilience and modernisation.
• Improving cross-border payments: The Bank will also continue working with other central banks and international partners to improve interoperability between payments landscapes to achieve frictionless cross-border payments.

What happens next?

The Bank hopes that the paper will start a conversation around how to keep UK payments at the forefront of technological innovation, both at home and internationally. The government's upcoming National Payments Vision will likely pick up on many of the themes sets out by the Bank.

The deadline for responding to the discussion paper is 31 October 2024.