The UK’s payments landscape has transformed significantly over the years, evolving from cheques to real-time settlements through smartphones.
While these advances have made transactions safer and more efficient, there’s still room for improvement, especially when looking at innovative practices in countries like India, Brazil, and Sweden.
In these nations, consumers can pay directly from bank accounts using mobile numbers or QR codes, even for small businesses.
A key area of potential innovation lies in applying tokenization technology to conventional money, rather than limiting it to crypto assets.
Tokenization allows for digital representations of assets on programmable platforms like blockchains.
This can embed payments more efficiently into our digital economy, for instance, enabling automatic payments upon delivery for online purchases.
This technology could bolster competition and consumer confidence in new online retailers or platforms.
In wholesale payments, tokenization can enhance settlement speed and cost-efficiency, automate back-office processes, and increase the tradability of diverse assets.
Such advancements could drive greater choice and functionality, spurring economic growth.
The Bank of England (BoE) is pushing for further modernisation through a newly published discussion paper, underscoring the need for continued innovation.
Confidence in payment systems and money—trust in both the ‘rails’ (payments) and the ‘trains’ (money)—is central to the BoE’s mandate for monetary and financial stability.
The BoE maintains this trust by issuing money (banknotes and bank reserves), settling interbank payments via its Real-Time Gross Settlement (RTGS) system, and regulating both commercial bank-issued money and interbank payment systems like cards and online banking.
However, merely maintaining the status quo isn’t enough. The BoE’s role as both provider and regulator must evolve to enhance the infrastructure.
For instance, new regulatory regimes are proposed for tokenized securities and stablecoins to ensure they can be used safely for real-world payments.
The BoE will continue issuing physical banknotes as long as there’s demand but is also exploring a digital version of banknotes—a retail Central Bank Digital Currency (CBDC)—to adapt to declining cash usage.
Significant progress has been made in renewing the RTGS service, set to launch soon, but further innovation is needed.
The BoE urges banks to enhance the UK’s interbank payment systems to match international standards. Commercial banks issue the majority of retail payments in the UK, and they must innovate to ensure a CBDC isn’t the only viable option in a digital future.
Collaboration is key.
The BoE will work closely with the Treasury, the Financial Conduct Authority, and the Payment Systems Regulator. Modernising the BoE’s own payment infrastructure is also crucial.
As tokenization impacts financial markets, the BoE plans to experiment with wholesale CBDC technologies, ensuring financial stability benefits continue with central bank money settlements.
These experiments will align with similar initiatives globally.
The goal is a robust and dynamic UK economy.
Achieving this requires collective effort from government and business. The BoE’s contribution is to drive innovation in money and payments, modernising the fundamental infrastructure that supports commerce and the digital economy.
By focusing on these advancements, the UK aims to remain at the forefront of global financial innovation, supporting openness, trade, and economic growth.
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