Some environments can induce a kind of dream-like state in people overcome by their grandeur. You’d think that Bank of England Governor Andrew Bailey, the ‘Banker’s Banker’ would be over this by now — but no!
In this year’s Mansion House speech, we were treated to his vision of a future — one that’s so disconnected from the real world I suspect even Alice in Wonderland would be asking what Bailey is smoking.
A vision of not only Britain again leading the world:
“What the history of the City suggests is that there is a great capacity to move on from past successes and seize the opportunity to get out in front again. We have that opportunity again with the digital world, but we need to take it.”
But that this will be achieved by calling to action… The incumbent banks!
I don’t think we should be using enhanced digitalisation materially to shift the mix of commercial bank and central bank retail money towards the latter. Commercial banks support credit creation and lending in the economy, and I do not wish to see this impaired. We want to encourage more thinking and action in the world of enhanced digital bank deposits — sometimes call tokenised deposits. So, yes, this is a call to action particularly to banks — don’t leave central banks as the only show in town. That’s not what we want.
A call-to-action. For innovation. To the very incumbent banks that have stood as the chief obstacle to financial innovation for two generations now! Saying…
This is all very exciting and puts us on the threshold of what can be major changes.
His new theme, with new terminology to boot, no doubt carefully crafted to facilitate this ‘vision’, is twofold:
- The ‘Singleness’ of Money. (Ala Humpty Dumpty’s “it means just what I choose it to mean — neither more nor less”. So it also came in handy for covering recent tracks around the action taken around Silicon Valley Bank)
- Enhanced Digitalisation / Enhanced Digital Money — and the Digital Pound
Here’s some key points:
On Enhanced Digital Money and Smart Contracts
- Bailey sees the prospect of enhanced forms of digital money as promising. These forms of money satisfy the tests of singleness and settlement finality. He defines enhanced digital money as a unit of money to which more executable actions can be attached, such as contingent actions in smart contracts. These could be simple or complex, but the singleness of money is preserved. This programmable money is controlled and programmable by owners and users, not by authorities.
On Central Bank Digital Money
- Bailey raises the question of whether all forms of enhanced digital money should come through central banks. His answer is not uniquely. He believes there is no reason that well-designed enhanced digital money should be the sole preserve of central banks. However, achieving this will require engagement and innovation all round.
On the Future of Enhanced Digital Money
- Bailey believes there is a future for digital money. While the precise answer is unknown, he thinks it is more likely than not that digital money has a future. He encourages not to fail in imagination and not to dismiss the potential of digital money due to the inability to specify a very precise detailed use case today.
On the Bank of England’s Real Time Gross Settlement System
- Bailey mentions the renewal of the Bank’s Real Time Gross Settlement system, which he believes puts the Bank in a strong position to deliver solutions that can integrate central bank digital money with tokenised transactions. This is seen as the fastest and most efficient route to take.
On Retail Central Bank Digital Currency (CBDC)
- Bailey discusses the Bank of England’s exploration of the case for retail CBDC. He mentions a public consultation that attracted a record number of responses. The feedback from this consultation will be an important input to their work and will provide the foundation for a future decision on whether to go ahead with a retail CBDC or not.
On Stablecoins
- Bailey also mentions proposals to create digital money in the form of stablecoins, which could be issued by banks or non-banks. He states that the Bank of England will soon set out proposals for regulating systemic stablecoins. Such stablecoins will have to meet the tests of singleness of money and settlement finality.
And about incumbent banks and their roles and (desired) actions:
The Role of Banks in Maintaining the Singleness of Money
- Bailey highlighted the role of banks in maintaining the singleness of money. He mentioned that bank deposits are considered money and discussed the need to ensure confidence is maintained in this aspect.
The Impact of Bank Failures on the Singleness of Money
- He discussed the recent failures of banks in the US and Switzerland, and the need for clear ground rules on the principle of singleness in the event of a bank failure. He emphasized that in designing and implementing resolution strategies, any uncertainty over what will happen should be avoided.
The Need for Banks to Innovate in the Digital Space
- Bailey encouraged banks to engage in the development of enhanced forms of digital money that satisfy the tests of singleness and settlement finality. He stated that well-designed enhanced digital money is not the sole preserve of central banks and requires innovation from all sides.
The Call to Action for Banks
- Bailey made a call to action to banks, urging them not to leave central banks as the only players in the field of enhanced digital bank deposits. He emphasized that he does not wish to see the role of commercial banks in supporting credit creation and lending in the economy impaired.
The Regulation of Stablecoins
- Bailey mentioned that proposals for regulating systemic stablecoins, which could be issued by banks or non-banks, will be set out soon. He stated that such stablecoins will have to meet the tests of singleness of money and settlement finality.
The Prospect of Wholesale Enhanced Digital Money
- Bailey discussed the prospect of wholesale enhanced digital money and the role of the Bank of England in this area. He mentioned the potential to revolutionize the productivity of important parts of the financial system, particularly in areas like settlement and custody. He also emphasized the need to maintain the ability for wholesale financial transactions to settle in central bank money, the safest form of money.
Well, I’ve still no idea what they’re smoking in there but at least we now know, as if there were much doubt, who the governor, and under him the Bank of England, are pitching hard for: The Incumbents.
I need hardly add that he mentions ‘Finetch’, the real source of financial innovation, not at all!
Normal service will be resumed… Well — I wonder when the Treasury and the Bank of England will at last reconnect with the real world!
Barry E. James, Founder Humane Economics, Industrial Fellow at Royal Docks School of Business and Law at the University of East London. Views expressed here are my own and not necessarily those of the organizations I lead or support.