TLDR
The Bank of England (BoE) plans to conduct experiments with wholesale CBDCs and distributed ledger technology
The experiments will test settlement capacity, interoperability, and various transaction types
The BoE aims to ensure âsingleness of moneyâ is maintained with stablecoins and tokenized deposits
The central bank will work with other UK financial regulators on these experiments
The BoE is cautious about widespread DLT adoption but wants to prepare for potential impacts
The Bank of England (BoE) has revealed plans to conduct a series of experiments with wholesale central bank digital currencies (wCBDCs) and distributed ledger technology (DLT).
This move comes as the central bank aims to keep pace with innovations in the payments landscape and assess both the opportunities and risks presented by emerging financial technologies.
In a discussion paper released on July 30, 2024, the BoE outlined its intention to test the settlement capacity and interoperability of wCBDCs and DLT within its Real-Time Gross Settlement (RTGS) system.
The bank plans to undertake these experiments within the next six months, focusing on comparing CBDC settlement with the synchronization of non-CBDC central bank money.
The BoEâs experiments will explore various transaction types, including delivery-versus-payment (DvP) for securities and payment-versus-payment (PvP) for foreign exchange. These tests will build upon findings from previous projects, such as Project Meridian, which examined synchronization networks integrated with existing RTGS systems.
While the central bank expresses caution about the widespread adoption of DLT, it acknowledges the need to prepare for potential impacts on monetary and financial stability. The BoE notes that the extent of these impacts will depend on the financial marketsâ uptake of these technologies at scale.
A key focus of the experiments is ensuring the âsingleness of moneyâ is maintained, even with the introduction of stablecoins and tokenized deposits. This concept refers to the interchangeability of different forms of money, including cash, bank deposits, and potentially new digital assets.
To address these complex issues, the BoE plans to collaborate with other UK financial regulators, including the Treasury, Payments Systems Regulator, and the Financial Conduct Authority. This cooperative approach aims to create a comprehensive framework for integrating new technologies into the existing financial system.
The announcement comes as central banks worldwide grapple with the rise of cryptocurrencies and the potential need for CBDCs. The BoEâs experiments are part of a broader trend of central banks exploring how to interact with DLT and digital currencies effectively.
One notable aspect of the BoEâs approach is its consideration of both wCBDCs and synchronization methods. Synchronization would allow separate ledgers to communicate, facilitating fund earmarking and payment settlement. The bank plans to compare these approaches to determine their relative merits.
The BoE also raised design questions about wCBDCs, noting that previous experiments have typically minted CBDC from currency already present in the RTGS, rather than minting it ânatively.â
The bank is considering whether the platform on which CBDC is minted should be controlled by the central bank or a third party.
These experiments represent a significant step in the BoEâs ongoing exploration of digital currencies. The central bank has been investigating the feasibility of a CBDC, sometimes referred to as âBritcoinâ or the digital pound, since at least February 2023.
While a potential launch of a retail CBDC is not expected before the end of the decade, the BoE has been steadily increasing its resources dedicated to CBDC research and development.
The BoEâs cautious yet proactive approach reflects the complex challenges posed by rapidly evolving financial technologies. As Governor Andrew Bailey stated,
âConfidence in money and payments is fundamental to the Bankâs responsibility for monetary and financial stability. As innovation in this space continues, our role must also evolve, to support a robust and dynamic UK economy.â
The central bank is inviting responses to its discussion paper through October 31, 2024, as it seeks to engage with a wide range of stakeholders in shaping the future of the UKâs monetary system.
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