Sir Cunliffe highlighted that although central bankers are tasked with "forecasting the economic future," it is not "an easy task." Further, when attempting to maintain financial stability, central banks must be "forward looking" because as Sir Cunliffe explained, "while we cannot be certain how new technologies and social and economic trends will play out, we need to have though through in advance how the risks might need to be managed and, where the likelihood of major change is high, have the regulatory frameworks and powers in place."

In addition to this, "we want competition and innovation in financial services." It is evident that society is gradually moving away from publically-issued, Bank of England, physical money and towards electronic money issued by private sector banks. This is due to the digitalisation of everyday life, the implementation of Pay.UK’s New Payments Architecture, RTGS, High Value Payment System and the expansion of the open banking framework, as announced at IFGS, as well as the technologies that have been refined in the cryptocurrency world such as tokenisation, encryption, distribution, atomic settlement and smart contracts.

Sir Cunliffe went on to discuss four areas where the tokenisation of money is now being explored: stablecoins being used for payments, the tokenisation of commercial bank deposits, the Bank of England’s work on issuing a Digital Pound and the Bank’s work to ensure these new forms of money are robust and uniform.

Stablecoins

While stablecoins offer the possibility of greater efficiency and functionality in payments, Sir Cunliffe stated that they "currently sit outside most of the regulated framework and it is extremely unlikely that any of the current offerings would meet the standards for robustness and uniformity we currently apply both to commercial bank money and to the existing payment systems that transfer commercial bank money between the parties to a transaction."

The Financial Services and Markets Bill will give the Bank of England the power to regulate operators of systemic payment systems and systemic service providers using ’digital settlement assets’, including stablecoins that are used, or are likely to be used, for payments, at systemic scale in the UK. It will also allow the FCA to regulate the issuance and custody of fiat-referenced stablecoins for conduct and market integrity. The central bank and the FCA will consult later this year on the regulatory frameworks applied to stablecoins.

Commercial bank deposits

UK banks and those in other regions have been investing in the development of tokenised deposits as settlement assets on new forms of ledger such as DLT. Sir Jon Cunliffe said that the "majority of this effort appears to have centred on wholesale as opposed to retail financial transactions, though there are signs that attention is now being given to tokenisation of retail deposits."

He added: "An alternative to allowing tokenised deposits to circulate freely and be directly transferable would be to require transactions on new forms of ledger, for example transactions in smart contracts involving tokenised deposits, to be settled ultimately by the adjustment of bank ledgers as happens now. In other words a transfer of tokenised deposits on one set of ledgers would trigger the adjustment of individuals’ bank account balances and be settled by a transaction between the banks involved. In that case, deposit money issued by a bank could only ever be held in an account at that bank.

"It is important that as we develop the regime for payment stablecoins, we also develop the approach for tokenised bank deposits. This will allow, banks and non-banks alike, that want to develop payment solutions using new technologies to understand clearly what is possible and what is required in the respective regulatory regimes. The PRA intends to set out its approach in this area alongside the Bank’s consultation on the payment stablecoin regime."

Digital Pound

The Bank of England and HM Treasury published a consultation paper in February 2023 on the Digital Pound – a Sterling digital currency that would be issued by the Bank of England for general purpose retail use. Sir Cunliffe affirmed that no decision has been taken to implement the Digital Pound but the Bank and Treasury’s assessment is that it is likely to be needed if current trends in payments and money continue.

"The Bank and Treasury consultation paper proposes a ‘platform’ model of the Digital Pound in which the Bank would provide the digital settlement and central transfer mechanism and the private sector would provide the wallets and consumer facing payment services. The Digital Pound would therefore be available to a wide variety of private sector innovators who wished to develop tokenised payment related services but do not wish or are not able to issue their own tokenised settlement asset."

Further, "the Bill now in Parliament will enable us, with the FCA, to set up a sandbox in which developers can explore ideas like collapsing trading and settlement into an instantaneous smart contract."