Yesterday, Bank of England Governor Andrew Bailey attended a Treasury Select Committee hearing on financial stability. During the session, there was a discussion on stablecoins and a digital pound, both a retail and wholesale central bank digital currency (CBDC). Bailey doesn’t see the need for either of them. His comments are summarized first and the full transcript is below.

On the subject of stablecoinsHe said he couldn’t imagine a sufficiently backed stablecoin other than a synthetic CBDC (which has the backing assets deposited in an account at a central bank).

Bailey did not specifically mention Fnality, backed by 17 financial institutions, which 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 your settlement token, which is technically a synthetic CBDC. It has not yet been launched, but it 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 money versus central bank money

Bailey’s most interesting observation is that today there is a clear line between central bank money and commercial bank money. Digital currency, we would assume especially a private sector synthetic CBDC, could blur the lines between central bank money and commercial bank money. He said serious thought should be given to the economics of any boundary changes.

Last week, Andrew Griffith, the Treasury Economic Secretary, said he thought a wholesale private sector stablecoin would precede a wholesale CBDC, which he believes will happen before a retail CBDC.

Bailey sees no need for a wholesale CBDC because the Real Time Gross Settlement (RTGS) system used for interbank payments already settles in central bank money.

One of the members of parliament stated that a key benefit of a DLT is the huge volumes of transactions in seconds. The Governor correctly answered that a RTGS is faster than a distributed ledger. We note that, depending on the technology, DLTs invariably Will be slower because they require consensus. We understand the real benefit is the ability to settle tokenized assets on-chain, with distributed ledgers eventually improving liquidity in capital markets and reducing bank liquidity fragmentation.

About Retail CBDC, the Governor is not convinced that any problem needs to be solved. If there is public demand, you need clarification on the distinction between a stablecoin with certainty of value and a CBDC. This goes back to his opening statement on the topic: a secure stablecoin must be a synthetic CBDC.

Andrew Bailey transcript on CBDC, stablecions

One of the members of parliament pointed out that Andrew Griffith, the Treasury Economic Secretary, had said that a stablecoin is more likely to precede a central bank digital currency. He asked the Governor for his thoughts.

Governor Bailey responded. “That’s a very interesting question. Fascinating. So one of the questions that comes up is the FPC (Financial Policy Committee of the Bank of England) has already set its own standards, the principles that you should apply to a sterling stablecoin, particularly what we call a systemic sterling stablecoin. So the ones that have a broader use (that) you’re talking about here.

Now, certainty of value is critical there, and that gets to the cold question of supporting assets. And I think for me, a big question is can we imagine a sterling stablecoin, that meets those criteria, that is not something that looks like a synthetic central bank digital currency? Because the last risk-free sterling stablecoin would be a 100 percent central bank reserve backed instrument.

Now, interestingly, I want to say that this is a historical thing, it’s relevant to Scotland. Because we have a very traditional arrangement for banks issuing banknotes in Scotland and Northern Ireland, which is a bit like that, oddly enough. So sometimes I say that in a way you are talking about a digital version of a Scottish bank. (Currency) Issued by commercial banks, but fully backed by the Bank of England.

And we reviewed the rules during my time as cashier because there were some loopholes. I think it’s going to get to the question, what’s the difference between that and a central bank digital account? I will not go into the Scottish subject. I can leave that to you, Alison.

But let me finish. I don’t want to talk all day about it. However, there is another important issue there. 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, the wholesale central bank money is already available in electronic format and, among other things, we are revamping the LBTR system to make it more digital. But it is not accessible to the public. The only way the public can get money from the central bank is (through) banknotes. And there’s probably a limit to the number of tickets any of us wants to have, for obvious reasons.

So the question of 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 times of stress, because it would facilitate bank runs.

And that’s important because the money from the commercial banks is where the lending to the economy happens. We do not lend to the economy. That’s not our job, and we wouldn’t want it to become our job.

By the way, we’re not going into the business of being a retail bank. That’s clear. But we have to think about the economics of that quite a bit because it potentially changes the cap.

The Governor was then asked about the advantages of a wholesale CBDC.

The question of whether we need wholesale CBDC leads to the question of whether it is different from having an LBTR system or a real-time growth settlement system. And particularly the one we’re building to revamp the one that’s been here for 25 years, which is a more digitally open and improved LBTR system.

You see, I’m not sure it’s (necessary) because [unclear] (Not sure) a wholesale CBDC and a digital LBTR system are different because digital LBTR or any LBTR (like) we have today is settled in central bank money. It’s central bank money.

The existing system is over 25 years old. In fact, he made his first day of a billion pounds recently. So it’s a pretty venerable system that works.

A committee member noted that the promise of the technology is massive volume of transactions in seconds.

If you don’t mind my saying so, I think that remains to be seen. I don’t mean that as a Luddite. Because sometimes, payment experts come to me and say that it’s great to see distributed ledgers, but a RTGS system is faster. But we’ll see.

The point is, I think it’s an open question whether wholesale central bank digital currency is needed because we have a wholesale central bank money settlement system that we’re doing a major upgrade to. It is the biggest investment project that the bank has ever done, to improve it and 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 are very clear that we are not trying to abolish cash.

I give quite a few talks on this. It may seem wrong to say that we have to be very clear about what problem we are 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 don’t sell to me. So I’m not necessarily convinced that retail payment systems need this kind of upgrade.

At the moment, we are not trying to replace cash. We satisfy the demand of the public. If the public wants banknotes, the public gets banknotes. And if they want digital currency, well, we’ll consider it.

What I come back to, and frankly I’m still thinking a lot about this, is: if there’s a demand for retail digital money, if there’s a demand for stablecoins, and we need to set the bar very high because of the certainty of value of stablecoins. : is it really different from the central bank digital currency? And should we make that distinction or not? It remains for me an open question.