The Bank of England’s (BoE) latest discussion paper surrounding various payment and digital asset innovations reveals that whilst the central bank is exploring these areas, it still has its guard up to the risks involved.
The in-depth discussion paper touched on a wide range of payment and financial aspects relating to blockchain technology and use cases for the potential implementation of digital assets, such as stablecoins.
The UK central bank revealed that it has already begun developing tokenised assets within the recently launched Digital Securities Sandbox, co-launched at the beginning of the year alongside the Financial Conduct Authority (FCA).
Tokenised assets, both physical and digital, have been developed within this sandbox, such as deposits and stablecoins, with the BoE stating that the latter has so far been used for retail purposes.
Other actions the bank has taken in regards to digital innovation has been its retail work surrounding Central Bank Digital Currencies (CBDCs). The BoE outlined that a UK CBDC would “ensure that central bank money remains useful to households and businesses in an ever more digital economy”, as well as a boost to the private sector and bolstering payment options.
However, a decision has not yet been made in regards to whether the UK will pursue the issuance of a CBDC as the BoE reaffirms a commitment to cash and boosting its inclusion amongst the ever-evolving digital payments landscape.
Campaigners against CBDCs, one being US Presidential candidate Donald Trump, often cite its ability to easily trace transactions which raise privacy concerns regarding the government’s influence over the digital currency.
Amongst the central bank’s other responses to digital financial innovations, it has confirmed an enhancement of its capability to supply wholesale bank money for settlement as part of a new multi-year programme to deliver a new RTGS service. As part of this, Omnibus Accounts can now facilitate settlement backed in central bank money for tokenised asset transactions.
Like many other countries across Europe, the UK has been deepening its usage of distributed ledger technology (DLT) to bolster its tokenisation abilities, which is quickly becoming one of the more prominent digital financial innovations over the last several years.
The UK central bank states that DLT usage for tokenisation can remove friction by adding/replacing ledgers as part of the transaction process by building new financial contracts in a digital form.
Tokenisation also provides an extra layer of security when it pertains to certain payments. Mastercard has been championing its usage of this technology mainly due to its ability to send the payee a unique digital code that can protect the transaction from falling into the wrong hands.
In regards to how the BoE will develop on these innovations further, it will look to address financial stability risk appetite assessments on the use of wholesale settlements for central bank money.
Furthermore, the bank will also continue to develop its RTGS service with new functionalities that enable external ledgers to settle central bank money assets, including CBDCs.
For wider industry feedback and recommendations, the BoE has invited responses to the discussion paper by a 31 October 2024 deadline.