Bank of England governor urges banks to make progress on tokenized bank deposits – Ledger Insights

On Monday, Bank of England (BoE) Governor Andrew Bailey gave a speech on the future prospects for money, diving into the potential of new forms of digital currency. Mr. Bailey wants to preserve the status quo between financial institutions and the central bank, but he also wants to encourage banks to push for more innovation, particularly around tokenized deposits. The BoE sees the need to protect the foundations of safe money as the economy goes digital, but not just with a central bank digital currency (CBDC).

The future of “enhanced digital money”

In his speech, Mr. Bailey referred to two basic foundations of money “on which the economy depends and on which the public can rely”. one is the singleness principle that refers to the concept that all money has the same value. the other is settlement purpose. In other words, once we pay for something, the transaction is complete.

However, the Governor believes that current technological developments threaten to put safe money at risk. He says that stablecoins generally fail basic tests of uniqueness and settlement finality and that what we need is a new form of “enhanced digital money” capable of incorporating new features, such as the storage capacity of smart contracts, while while preserving your intrinsic security and confidence. This will be particularly important in the case of a retail CBDC or digital pound.

But should central banks be the only ones leading this campaign? Mr. Bailey says not quite. In the UK, commercial bank money accounts for 85% of payments made by the public, and the Governor says the BoE has no intention of changing this mix when it comes to digital currencies. However, he calls on banks to take steps to ensure that remains the case.

“We want to encourage more thought and action in the world of enhanced digital bank deposits, sometimes called tokenized deposits,” Mr. Bailey said. “So yes, this is a call to action particularly for banks: don’t leave central banks as the only show in town. That’s not what we want.”

Central Bank Money vs Wholesale CBDC

When discussing wholesale use cases, the Governor spoke about central bank money rather than a wholesale CBDC.

The BoE has been heavily involved in overseeing the launch of Fnality, an institutional distributed ledger technology (DLT) platform that uses a synthetic Wholesale CBDC, in which banks deposit money into a central bank omnibus (shared) account, which is tokenized. The Governor also discussed the potential of his revamped Real Time Gross Settlement (RTGS), which is designed to be able to support integration with third party DLT systems.

Meanwhile, last week, banking trade body UK Finance asked the government to explore whether there is industry appetite for shared infrastructure to support CBDCs and deposit tokens to settle digital assets.