In a speech yesterday, Sir Jon Cunliffe, Deputy Governor of the Bank of England, outlined the Bank’s approach to tokenized money in various forms, including stablecoins, deposit tokens and central bank digital currency (CBDC), mainly wholesale.
The Financial Services Markets Bill will provide the Bank with the powers to regulate payment systems and providers that use ‘digital settlement assets’. Hence, the Bank’s Prudential Regulation Authority (PRA) is working on stablecoin rules.
“It is important that as we develop the regime for payment stablecoins, we also develop the approach for tokenised bank deposits,” said Cunliffe. “The PRA intends to set out its approach in this area alongside the Bank’s consultation on the payment stablecoin regime.”
He distinguished between two different potential types of tokenized bank deposits. In one case, the tokenized deposit would be freely transferable, including to someone who does not have an account with the bank. This scenario is problematic for regulators for anti-money laundering (AML) purposes and because it’s unclear how deposit insurance might work.
The alternative approach is for users to send payments using bank tokens of their own bank, which are switched into tokens of the recipient’s bank on receipt. The banks settle up with each other using a distributed ledger network. This means all holders of bank tokens have an account with that bank.
Some banks might instead choose the stablecoin approach. However, there are concerns about the confusion between bank money and the stablecoin that does not carry deposit insurance. Notably, Cunliffe said not ‘initially at any rate’. Hence if banks launch stablecoins, they could do so under the new regime, but that would be through a separate legal entity. It’s likely the branding would also be distinctive to avoid confusion.
England’s approach to wholesale CBDC
Apart from discussing stablecoins and deposit tokens, the Deputy Governor also spoke about wholesale CBDC used for interbank transactions. “The question is not whether but how we should develop the machinery for tokenised transactions to settle in central bank money,” said Cunliffe.
He acknowledged the Bank has been exploring a wholesale CBDC payment infrastructure. An alternative is private network solutions where tokenized cash is held in an omnibus account at the central bank, such as Fnality.
A third option is to enable a tokenized ledger to synchronize with the real time gross settlement system (RTGS). With an upgraded RTGS due to launch next year, this is being explored in the London center of the BIS Innovation Hub.
While Cunliffe didn’t go into detail on retail CBDC, the Innovation Hub has another CBDC initiative, Project Rosalind, that’s testing CBDC access for payment providers using an API. In February, the Bank of England and HM Treasury launched a consultation on a retail digital pound CBDC.