Bank of England to Test DLT and Wholesale CBDCs for Payments

The Bank of England is set to conduct a series of experiments with distributed ledger technology (DLT) and wholesale central bank digital currencies (CBDCs) to evaluate their impact on the payments landscape.

The initiative aims to address the rapid advancements in money and payment technologies with its wholesale CBDC, as outlined in a discussion paper released on July 30 by Governor Andrew Bailey. The paper, titled “The Bank of England’s approach to innovation in money and payments,” highlights that innovations such as DLT and tokenization present both opportunities and risks.

“Innovations in money and payments are therefore inseparable from the goals we seek to achieve as central banks. Understanding these innovations, preparing for them, and supporting their adoption in a safe manner, are core to our goals,” Bailey noted.

Unlike retail CBDCs designed for the general public, wholesale CBDCs are digital versions of a country’s currency intended exclusively for financial institutions. These digital currencies streamline transactions between banks and other financial entities, enhancing both the speed and security of large-scale transactions and settlements.

Addressing Interoperability Challenges

The Bank of England acknowledges an “interoperability challenge,” where different jurisdictions could create systems that cannot interact effectively. To tackle this, the regulator aims to develop a “synchronization interface.” This tool would facilitate transferring an asset from one party to another on an external platform, with the cash leg of the transaction taking place on the real-time gross settlement platform.

Seeking Public Feedback

To remain competitive in the global central banking arena, the Bank of England plans to test various use cases, functionalities, and designs for wholesale CBDCs and their synchronization. While specific timelines for these experiments have not been disclosed, the bank is seeking public feedback on its proposed approach, with responses due by the end of October.

In June, the Bank for International Settlements (BIS) issued a report indicating that a vast majority of central banks worldwide are steering away from issuing retail versions of CBDCs in the medium term, with only 12% of respondents expressing plans to do so. The report also indicated a higher likelihood of wholesale CBDCs being issued within the next six years, with the potential for nine such currencies to be in circulation “by the end of this decade.”

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