Today the Bank of England published a discussion paper on innovation in money and payments. While it covers payments across the board, it aims to gather feedback for planned wholesale central bank money trials. This will include both a wholesale central bank digital currency (wCBDC) and a synchronization solution enabling DLT transactions to settle using the real time gross settlement (RTGS) system.
There are several drivers behind this move. One of the Bank’s concerns is the potential future use of stablecoins in the wholesale market, which hasn’t happened so far. The report states, “We judge that these risks are an order of magnitude greater than the risks posed by retail use cases.”
At a retail level, the UK is now testing tokenized deposits through the Regulated Liability Network initiative. However, the paper warns of the need for progress. “Commercial bank money needs to keep pace with the needs of consumers and so carry functionalities to deliver safe and sustainable innovation in payments,” wrote the authors. “Absent such innovation, central banks may be left as the only game in town insofar as retail payments innovation is concerned.”
Hence, the Bank asked respondents for views on the sort of wholesale infrastructure needed to support tokenized deposits.
Another question is about the potential functionality of a wCBDC design.
wCBDC trials
Regarding the wholesale CBDC trials, in conjunction with the BIS Innovation Hub, the Bank already ran Project Meridian, which enabled a digital real estate transaction to settle via connectivity with the RTGS. Currently it’s running Project Meridien FX with the European Central Bank.
The paper outlines a series of planned wholesale tests for both the wCBDC and the synchronization solution. It envisages the latter as being a third system that integrates between the RTGS and various DLTs. It wants to run the tests side-by-side so it can make comparisons between the wCBDC and synchronization risks and complexity.
The tests encompass delivery versus payment (DvP), including the settlement of primary bond issuance transactions, as well as secondary market transactions. It also wants to trial a digital securities transaction in which an end user makes a tokenized deposit payment.
Other uses cases will involve payment versus payment (PvP). Synchronization is already being trialed as part of Project Meridian FX, but it also wants to explore wCBDC.
Finally, it will test interoperability with global initiatives such as the BIS Project Agorá for cross border payments in which the Bank is a participant.
The Bank also asked whether respondents had particular use cases in mind.
Bank of England Governor Andrew Bailey made a pertinent observation in the preface. “Policymakers must have the humility to accept that the nature and pace of change and innovation is such that one’s assessment of where we might stand years into the future may be outdated within weeks.”
