Bank of England Warns on Modernizing Central Bank Money

The Bank of England has cautioned that failing to modernize central bank money could shift wholesale settlements to private assets, posing risks to financial stability.

Potential Risks of Private Assets in Wholesale Settlements

At Digital Assets Week in London, Sasha Mills, the Bank of England’s executive director for financial market infrastructure, highlighted the dangers of not adapting to emerging technologies like tokenized assets and programmable ledgers. According to Mills, this could lead to high-value settlement activities moving from central bank money to private assets such as stablecoins, thereby undermining the financial system’s stability.

“We have a low-risk appetite for a significant shift away from wholesale settlement in central bank money towards private settlement assets (such as from the use of stablecoins for wholesale transactions), because settlement in central bank money is the anchor back to the state.”

Balancing Innovation and Risk

Mills also discussed the central bank’s efforts to modernize its infrastructure to support innovative technologies. She emphasized the importance of the newly launched Digital Securities Sandbox, an initiative with the Financial Conduct Authority aimed at testing new technologies in a regulated environment. However, she noted that the application of programmable ledgers in finance is still relatively new, making it risky to implement in critical financial markets.

To mitigate these risks, the Bank of England plans to develop the Digital Securities Sandbox in stages, with limits that adjust as firms meet higher resilience standards.

Exploring Central Bank Digital Currencies (CBDCs)

Mills mentioned that the central bank is also exploring how central bank money could interact with programmable ledgers through a potential wholesale central bank digital currency (wCBDC). As part of this initiative, the Bank of England plans to conduct a series of trials using distributed ledger technology to evaluate their role in the evolving payments landscape.

To stay competitive globally, the Bank intends to test different use cases, functionalities, and designs for wCBDCs and their integration. Although no specific timeline has been provided, the Bank is seeking public feedback on its approach, with responses due by the end of October.

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