Yesterday the Bank of England Governor, Andrew Bailey, attended a Treasury Select Committee hearing on financial stability. During the session, there was a discussion about stablecoins and a digital pound, both a retail and wholesale central bank digital currency (CBDC). Bailey doesn’t see the need for either. His comments are summarized first, and the full transcript is below.
On the topic of stablecoins, he said he couldn’t envisage a sufficiently well-backed stablecoin that is not a synthetic CBDC (which has the backing assets deposited in an account at a central bank).
Bailey didn’t specifically mention Fnality, backed by 17 financial institutions, that will operate an omnibus account at the Bank of England, effectively a joint account based on funds from these 17 institutions. The central bank account will provide the reserves for its settlement token, which technically is a synthetic CBDC. It has yet to launch but has already been recognized by the UK Treasury as a systemically important payment system. Fnality is also planning central bank reserves for a wholesale digital euro, dollar and yen.
Digital currency and commercial versus central bank money
The most interesting observation by Bailey is that today there’s a clear boundary between central bank money and commercial bank money. Digital currency – we’d assume especially a private sector synthetic CBDC – might blur the lines between central bank money and commercial bank money. He said the economics of any boundary changes need to be given serious thought.
Last week Andrew Griffith, the Economic Secretary of the Treasury, said he thought that a wholesale private sector stablecoin would precede a wholesale CBDC, which he sees as happening before a retail CBDC.
Bailey doesn’t see the need for a wholesale CBDC because the real time gross settlement system (RTGS) used for interbank payments already settles in central bank money.
One of the members of parliament asserted that a key benefit of a DLT is huge transaction volumes in seconds. The Governor correctly responded that an RTGS is faster than a distributed ledger. We note that based on the technology, DLTs invariably will be slower because they require consensus. Our understanding is the true benefit is the ability to settle tokenized assets on-chain, with distributed ledgers eventually enhancing liquidity in capital markets and reducing the fragmentation of bank liquidity.
Regarding retail CBDC, the Governor is unconvinced that any problem needs to be solved. If there is demand from the public, he needs clarification about the distinction between a stablecoin with certainty of value and a CBDC. This circles back to his opening statement on the topic: a secure stablecoin needs to be a synthetic CBDC.
Andrew Bailey transcript on CBDC, stablecoins
One of the members of parliament noted that Andrew Griffith, the Economic Secretary of the Treasury, had said that a stablecoin is more likely to precede a central bank digital currency. The Governor was asked for his thoughts.
Governor Bailey responded. “That’s a very interesting question. Fascinating. So one of the questions that gives rise to is the FPC (Bank of England Financial Policy Committee) that has already set out its own standards, the principles that it should apply to a sterling stablecoin, particularly what we call systemic sterling stablecoin. So ones that have wider use (that) you are talking about here.
Now, certainty of value is critical there, and that gets to the cold question of the backing assets. And I think for me, a big question is can we imagine a sterling stablecoin, which meets those criteria which is anything other than something that looks rather like a synthetic central bank digital currency. Because the ultimate risk-free sterling stablecoin would be a fully a hundred percent central bank reserve backed instrument.
Now, curiously, I mean this is a sort of historical, it’s relevant to Scotland. Because we have a very traditional arrangement for banks issuing bank notes in Scotland and Northern Ireland, which is a little bit like that, funnily enough. So I do sometimes say you are in some ways talking about a digital version of a Scottish bank. (A currency) which is issued by commercial banks, but fully backed at the Bank of England.
And we revised the rules during my time as chief cashier because there were some loopholes. I think you’re going to get to the question, what is the difference between that and a central bank digital account? I’m not going to get into the Scottish issue. I can leave that to you, Alison.
But let me just finish. I don’t want to talk all day about the subject. There is another important issue there though. There is a boundary between what we call central bank money and commercial bank money in the system we have now.
And that’s important. And of course, wholesale central bank money is available in electronic form now, and we’re actually renewing the RTGS system to make it more digital, amongst other things. But it’s not accessible to the public. The only way the public can get central bank money is (through) banknotes. And there’s probably a limit on the number of banknotes any of us want to have, for obvious reasons.
So the question about how we would imagine limiting the boundary between central bank money and commercial bank money in a digital world is an important one. Both in normal times and in stress times, because it would make bank runs easier.
And that’s important because commercial bank money is where the lending into the economy happens. We don’t lend into the economy. That’s not our job, and we wouldn’t want that to become our job.
By the way, we’re not going to get into the business of being a retail bank. That’s clear. But we have to think about the economics of that pretty hard because it potentially changes the boundary.
Next the Governor was asked about the advantages of a wholesale CBDC.
The question about whether we need wholesale CBDC gets to the question about is that any different from having an RTGS system or a realtime growth settlement system? And particularly the one we’re building to renew the one that’s been here for 25 years, which is a more digitally open and enhanced RTGS system.
You see, I’m not sure it is (needed) because [unclear] (I’m not sure) a wholesale CBDC and a digital RTGS system are different because digital RTGS or indeed any RTGS (like) the one we’ve got today settles in central bank money. It is central bank money.
The existing system is over 25 years old. It actually did its first trillion-pound day recently. So it’s a pretty venerable system that works.
A member of the committee noted that the promise of the technology is massive transaction volumes in seconds.
If you don’t mind me saying so, I think that remains to be seen. I’m not saying that as a Luddite. Because sometimes, the payments experts come to me and say it’s great to see distributed ledgers, but an RTGS system is faster. But we’ll see.
The point being is I think it is an open question whether wholesale central bank digital currency is needed because we’ve got a wholesale central bank money settlement system that we’re doing a major upgrade on. It’s the, biggest investment project the bank’s ever done, to enhance it to meet that world. So I think that’s an open question.
The Governor was then asked about his views on a retail digital pound.
By the way, we’re very clear we’re not trying to abolish cash.
I do quite a lot of talks on this. It can come across the wrong way by saying, we have to be very clear what problem we’re trying to solve here, before we get carried away with the technology and the idea.
And I think some of the problems that we might be trying to solve, I’m not convinced about. So I’m not necessarily convinced that the retail payment systems need this sort of upgrade.
At the moment, we are not trying to replace cash. We meet the public’s demand. If the public wants bank notes, the public gets bank notes. And if they want digital currency, well, we’ll consider it.
The one I come back to, and frankly I’m still thinking hard about this, is: If there is a demand for retail digital money, if there’s a demand for stablecoins – and we must set the standard very high because of the certainty of value of stablecoins – is it actually different from central bank digital currency? And should we make that distinction or not? It remains for me an open question.