Bank of England Governor Andrew Bailey discussed the importance of central bank money in both wholesale and retail payments in a speech on Saturday. He argued that the role of central bank money is particularly important for large-scale high-value payments and payment systems. Banks therefore want to enable digital innovation in the wholesale sector.
In July, we published a discussion paper on wholesale money, highlighting the potential for testing both wholesale CBDC and RTGS synchronization solutions.
However, Bailey believes that when it comes to retail payments, the Bank of England should be indifferent to whether payments are made using central bank money, such as a retail CBDC, or commercial bank money.
He is quite keen to maintain the status quo in that most retail payments are financed by commercial banks. In doing so, fractional reserve banking operations and the availability of credit in the economy are not hampered. When it comes to digital innovations, such as tokenized deposits, he thinks commercial banks should see that happen.
However, “if for some reason innovation is unlikely to occur, central banks will need to decide whether that is the only game in play. To me, this explains why we must continue preparing for a retail CBDC. Justification: We have not yet found sufficient evidence that innovation occurs in commercial banks.
Governor Bailey noted that infrastructure and technology may not foster innovation. It may also be related to the concentration of market power. Therefore, the exploration of CBDC is ongoing. “That’s not a desired outcome for me, but it’s not something that should be ruled out either.”
Tokenized Deposit Trial
Meanwhile, the UK banking sector is considering tokenized deposits as part of its regulatory accountability network. In September, it said its next step was to work with regulators.
The speech was perceived as “dazzling”, but it is not the first time the World Bank has made such comments. In April, Deputy Governor Sarah Breeden outlined potential scenarios in which the bank’s innovation could be delayed, fail or become fragmented.
Fragmentation is a feature of digital securities, but less so for tokenized deposits. Some banks genuinely support tokenized deposits for their own customers. However, there are also many projects that span multiple banks.
Ledger Insights Research has mapped over 70 tokenized deposits, stablecoins, and other DLT payment initiatives. Even excluding cross-border payments efforts, at least 18 banks span multiple banks.
