The Bank of England Governor Mark Carney has floated the possibility of allowing fintechs to deposit overnight money at the central bank. In last night’s bombshell speech at Mansion House in London, he explicitly mentioned Facebook’s Libra project. At this stage, the Bank is only exploring the possibility. No decision has been made.
Until now, only commercial banks have had access to central bank money, and additionally, broker-dealers can also deposit overnight in England.
“To support private innovation and to empower competition, the Bank is levelling the playing field between old and new,” said Carney. “This means allowing competitors access to the same resources as incumbents while holding the same risks to the same standards.”
He also echoed Libra’s aim of financial empowerment, saying: “Most fundamentally, the new payment system must end the inequity that the people with the least money pay the most for financial services.”
There’s been a lot of commentary about Libra this week. Some highlighted that, in many ways, Libra is more of a challenger to banks than to cryptocurrency.
While Carney seemed supportive of Libra, there are caveats. Access to central bank money will still be restricted and come with significant compliance obligations.
“The Bank of England approaches Libra with an open mind but not an open door,” said Carney. “Unlike social media for which standards and regulations are being debated well after it has been adopted by billions of users, the terms of engagement for innovations such as Libra must be adopted in advance of any launch.”
Facebook has targeted a launch in the first half of 2020. It’s conceivable or even probable that the initial rollout could be in a small number of regulatory friendly regions. Getting clearance in the U.S. and Europe by that date is ambitious.
Carney continued: “Libra, if it achieves its ambitions, would be systemically important. As such it would have to meet the highest standards of prudential regulation and consumer protection.” He stated it would need to comply with anti-money laundering, data protection and operational resiliency requirements. Additionally, the impact on financial stability needs exploration.
He went on to say that the Bank of England would “help lead the way” on these issues with the G7, G20 and significant regulatory bodies such as the Financial Stability Board. Carney was Chairman of the Financial Stability Board from 2011 – 2018.
Below is the excerpt from the speech that talks about enabling central bank deposits for tokenized money. Carney also spoke about Fnality’s Utility Settlement Coin (USC) project.
Historically, only commercial banks were able to hold interest-bearing deposits, or reserves, at the Bank. That reflected their role at the core of the payment system. As new payment providers and systems emerge, access to the Bank’s core infrastructure should change and it makes sense to consider whether they too can hold funds overnight on the Bank’s balance sheet.
From the Bank’s perspective, expanding access can improve the transmission of monetary policy and increase competition. It can also support financial stability by allowing settlement in the ultimate risk free asset, and reducing reliance on major banks. Users should benefit from the reduced costs and increased certainty that comes with banking at the central bank.
From the perspectives of UK households and businesses, wider access can improve inclusion and services. This access could empower a host of new innovation. In wholesale markets, consortia of broker dealers are working to develop settlement systems using distributed ledger technology that could overhaul how markets operate. These consortia, such as USC, propose to issue digital tokens that are fully backed by central bank money, allowing instant settlement. This could also plug into ‘tokenised assets’ – conventional securities
also represented on blockchain—and smart contracts. This can drive efficiency and resilience in operational processes and reduce counterparty risks in the system, unlocking billions of pounds in capital and liquidity that can be put to more productive uses.
The potential transformation in retail payments is even more fundamental.
Earlier this week, a cooperative of technology companies proposed a new payments infrastructure based on an international stablecoin – Libra. Libra would be backed by reserve assets in a basket of currencies including sterling. It could be exchanged between users on messaging platforms and with participating retailers. As designed, Libra may substantially improve financial inclusion and dramatically lower the costs of
domestic and cross border payments.
The Bank of England approaches Libra with an open mind but not an open door. Unlike social media for which standards and regulations are being debated well after it has been adopted by billions of users, the terms of engagement for innovations such as Libra must be adopted in advance of any launch. Libra, if it achieves its ambitions, would be systemically important. As such it would have to meet the highest standards of prudential regulation and consumer protection. It must address issues ranging from anti-money
laundering to data protection to operational resilience. Libra must also be a pro-competitive, open platform that new users can join on equal terms. In addition, authorities will need to consider carefully the implications of Libra for monetary and financial stability. Our citizens deserve no less.
Leveraging our position at the heart of the international financial system and one of the world’s largest fintech hubs, the Bank of England will help lead the way on these issues at the G7, G20, the FSB, BIS and IMF.
Whatever the fate of Libra, its creation underscores the imperative of transforming payments. The Bank’s strategy to open access to a wide range of payment solutions combined with appropriate regulatory oversight of them maximises the likelihood that the payments revolution will meet the demands of the new economy and the needs of all our citizens.