On 15 April 2024, Sarah Breeden, Deputy Governor of Financial Stability at the Bank of England (BoE), delivered a speech explaining how the BoE seeks to deliver trust and support innovation, both as a provider and as a regulator of retail and wholesale money, against the backdrop of significant technological change in payments. In her speech, Ms Breeden considers the first-order threats and opportunities facing central banks and the private sector.

Innovation in money and payments

Ms Breeden explains that her aim is to set out how the BoE is seeking to ensure that it will be able both to capture the benefits of technological advances and to ensure they are safe. She notes that the BoE is increasingly focused on innovation within the wholesale payments landscape and the importance of payments innovation by banks. Ms Breeden also confirms that the BoE will publish a Discussion Paper on these areas in Summer 2024 to draw on input and collaboration from the private sector, as a complement to the work the BoE has been doing on stablecoin regulation and retail central bank digital currency (CBDC).

The speech outlines some examples of technological developments in payments, in order to highlight that there is a ‘genuine potential for these technologies to improve our everyday lives’ and to enhance wholesale payments and settlement. Examples given include tokenisation (distributed ledger technology and the potential for atomic settlement and programmability, as pioneered in the cryptoasset markets), as well as experiments with the private sector and the London Centre of the Bank for International Settlements’ Innovation Hub which have shown how use cases for technologies can embed payments more deeply, automatically and efficiently into our increasingly digital lives.

BoE role in payments innovation

Within the speech, Ms Breeden uses the metaphor of ‘trains and rails’, with money being the train and the payment system the set of rails by which that asset travels from sender to receiver. She notes that the BoE’s role for each is two-fold, acting as both provider and regulator:

  • Acting as provider by issuing its own money (cash and central bank reserves) and running the real-time gross settlement infrastructure (the system by which reserves are transferred between financial institutions.
  • Acting as regulator by regulating the money issued by commercial banks, and the interbank payment systems and card schemes through which that money is transferred.

To do this, Ms Breeden explains that the BoE must look ahead to identify which changes may be needed in each role, because:

  • Some of these technologies can reduce risks in the financial system.
  • As the central bank, the BoE must ensure that it provide central bank money and payments infrastructure with the requisite functionality to maintain confidence in different types of money in the economy.
  • It must ensure the UK’s regulated financial system is ‘delivering at the frontier’ in terms of outcomes for the real economy and financial market participants, to avoid new players growing quickly outside of the regulatory perimeter and creating new risks that are hard to address retrospectively.

BoE’s stablecoin proposals

Ms Breeden highlights the BoE’s November 2023 Discussion Paper on its proposed regulatory regime for stablecoins used at systemic scale in retail payments, as well as the Financial Conduct Authority’s proposed regime for stablecoins more broadly. She notes that there has been valuable feedback from a range of stakeholders in the cryptoassets, payments and banking sectors, as well as from academics and civil society.

The speech explains that the BoE’s proposals are focused on ensuring the new ‘train’ (the stablecoin itself) and the new ‘rails’ (the system that transfers the stablecoins from payer to payee) meet the BoE’s and the public’s expectations for them to be as safe as those currently used for retail payments (commercial bank money and interbank payment systems respectively). It also states that some respondents to the discussion paper said that the proposed regime would challenge stablecoin issuers’ business models and so might effectively bar use of stablecoins at systemic scale. Ms Breeden confirms that the BoE will closely consider all feedback and will then consult further on a draft rulebook.

Exploration of retail CBDC

The speech notes that at the same time as considering how to regulate new tokenised money for retail payments issued by the private sector, the BoE is also exploring whether to provide such money itself, and along with HM Treasury, is considering whether or not to issue a retail CBDC in the UK.

Ms Breeden emphasises that a decision has not yet been made on whether to issue a digital pound. It will carry out work over the next two years to make a robust and objective assessment of potential benefits and costs, including operational and technical feasibility. Key inputs into the decision to proceed with a retail CBDC will be:

  • The nature and scale of innovation in other forms of retail money, in particular commercial bank money.
  • How the BoE’s own wholesale payments infrastructure might evolve in support.

Supporting innovation in wholesale payments and financial markets

The speech concludes by noting that the BoE’s immediate focus has been on establishing regulatory regimes for stablecoins to be used safely for retail payments, and on considering whether a retail CBDC might be needed in the future. However, it confirms that the BoE is also increasingly working to complement that work with a focus on how it can best support innovation both in wholesale payments and financial markets (including through modernisation of the BoE’s wholesale payments infrastructure) and in banks’ retail payments offerings. 

The BoE plans to set out its thinking in these areas in a Discussion Paper to be published in Summer 2024.