BoE speech: innovation and safety in payment systems

Sarah Breeden, BoE Deputy Governor of Financial Stability, has delivered a speech on how the BoE intends to support innovation and technological advances in payments services whilst ensuring the safety of the sector. Since the announcement by Facebook of its proposed Libra currency in 2019, BoE has been focused on establishing a comprehensive regulatory framework for stablecoins to be used safely in retail payments, but is also now focusing more widely on providing support for innovation in wholesale payments and financial markets.

The speech highlighted the potential impact of distributed ledger technology (DLT) in payments innovation, for example by producing greater efficiency and functionality in retail and wholesale payments. The speech covered the ways in which BoE foresees its role may change and modernise as a result of payments innovation, including the following:

  • Some technologies have the potential to reduce risk in the financial system – such as by streamlining and integrating the variety of post-trade clearing and settlement activities into a single, instantaneous smart contract.
  • As technology advances, central bank money and payments infrastructure must provide the relevant functionality to continue to be the foundation for monetary and financial stability.
  • If the BoE does not adapt to new technologies, it risks new actors growing rapidly outside the regulatory perimiter.

Highlights from what the BoE is currently doing to address this include:

  • Publishing a Discussion Paper in November 2023 proposing a regulatory regime for stablecoins used in retail payments. Feedback from stakeholders in crypto, payments and banking sectors is being carefully considered, and theBoE will consult further on a draft rulebook.
  • Exploring a retail Central Bank Digital Currency (CBDC).
    • There is a risk that tokenised money could be issued by new players in ways that cannot transact with users outside of their platform, challenging competition in the market.
    • the BoE’s work across the next two years will be to prepare a robust cost/benefit analysis of issuing a CBDC, in the event the option is pursued with the consent of the Government.
  • Supporting the Digital Securities Sandbox lasting for five years, which will allow firms to set up trading venues and settlement systems using DLTs and new technologies.
  • Renewing the UK’s Real-Time Gross Settlement (RTGS) system to better facilitate automatic processing of payments domestically and cross-border. This includes looking at how BoE’s wholesale infrastructure can evolve to support tokenised transactions’ settlement
    • the BoE is exploring extending RTGS services to offer synchronised settlement, linking the centralised RTGS ledger to other ledgers using DLT.
  • Supporting payments innovation by banks, including exploring with six other central banks how tokenised commercial bank deposits could be integrated with tokenised wholesale central bank money to improve efficiency.

The BoE plans to publish a Discussion Paper this summer after input from the private sector.

Harry Wells