Tokenised money is emerging in various countries, with the Bank of England’s Sarah Breeden recently announcing plans for a discussion paper set to be released in summer 2024. This paper aims to gather insights from the private sector to enhance ongoing efforts regarding stablecoin regulation and retail central bank digital currency (CBDC).
Highlighting the decline in cash transactions, Breeden emphasized the importance of exploring retail CBDCs while recognizing that “as technological innovation takes place, we must not forget the contribution that retail central bank money has made to monetary and financial stability.”
There is a parallel need for the wholesale payments infrastructure to evolve alongside retail initiatives, with central banks globally investigating the tokenisation of central bank money via separate distributed ledgers, known as wholesale CBDCs. Both retail and wholesale CBDCs will influence the consistency of currency in the UK and beyond. It is essential to ensure that the value of money issued by different banks is equal and convertible one-for-one into cash. Settlements between banks should also occur through central banks in reserves, utilizing real-time gross settlement (RTGS).
As the technology underlying privately issued money advances—be it tokenised bank deposits or regulated stablecoins—Breeden noted that this uniformity of money may be enhanced not only by retail CBDCs but also through strengthening the Bank of England’s wholesale payments infrastructure to support settlements between these new forms of private money.
Central banks are keen to stay relevant in the CBDC movement, with payment innovation taking center stage in optimizing retail and wholesale payment functionalities. Recently, Swift confirmed that its CBDC interlinking technology would allow financial institutions to conduct a broad range of transactions using CBDCs and other digital tokens, seamlessly integrating them into existing operations.
Before retail or wholesale CBDCs become dominant, it’s crucial to address interoperability among digital currencies and tokenised assets to prevent the fragmentation that can arise from disparate technologies and standards. One immediate approach might be the implementation of the digital euro. According to Evelien Witlox from the European Central Bank (ECB), the digital euro could complement cash and “strengthen strategic autonomy by reducing dependence on non-European payment providers while offering a trusted means of secure transactions for people in Europe.”
Witlox emphasized the necessity for collaboration among market stakeholders, the European Retail Payments Board, civil bodies, and central banks prior to finalizing the digital euro. Currently, the digital euro is in a preparatory phase that began in November 2023 and will progress alongside regulatory development, with the next phase likely starting in 2025.
At a recent event, EBAday challenge speaker David Birch pointed out the various advantages of implementing an EU CBDC, including the creation of a pan-European payments scheme and the political implications of domestic sovereignty. Nonetheless, there are significant economic and social issues related to inclusivity and sustainability that also need to be considered.
Birch remarked that central banks require a deeper comprehension of digital currency to effectively roll it out in a way that informs consumers about its functionality and usage. He expressed skepticism regarding the utility of past pilots and trials, stating, “Essentially all of the pilots and trials that have been done to date are largely worthless because we don’t really know what we want the digital currency to do.” He underlined the necessity for meaningful public engagement and debate over the implications of digital currencies.
The benefits and risks associated with programmability, as well as the potential for market fragmentation from various public and private offerings aimed at similar use cases, will be examined at EBAday in Lisbon, Portugal, on June 18-19, 2024. You can register to join David Birch at this event here.