Bank of England has been most concerned with the future of commercial banks and the consideration of central bank digital currencies. BOE Governor Andrew Bailey, in delivering his speech at the Group of Thirty’s Annual International Banking Seminar in Washington, mentioned that the increasing evolution of digital payments requires careful thought and strategic planning, especially in light of challenges that might befall traditional banks in the years to come.
Opportunities in Digital Technology
Bailey said that many of the longer-standing issues in cross-border and wholesale payments could now be solved given digitization. A modernized payment landscape will imply efficiency, lower cost, and transparency. But he is convinced commercially that banks are best positioned to lead developments in retail payments. This reflects the more traditional vision of banks as part of the financial system. It has traditionally been down to them to spearhead making improvements in the field of payments.
Bailey was less delicate, however, on what may transpire should commercial banks fail to innovate adequately. He gave voice to many in the room: if they cannot try to match the pace at which their customers and the underlying market are developing, the central bank will have little option but to intervene. In the unlikely event of no such innovation taking place, then central banks would have to decide if they were the only game in town, he said, reflecting tempered expectations on whether any CBDCs would be necessary as a last resort.
The Rise of Fintech and Digital Currencies
But in the wider context, the concept of CBDC is particularly pertinent given the growing public interest in digital currencies-both those that exist outside of, or in some sort of competition with, traditional bank offerings and their so-called fintech challengers. Bailey said he wants banks to keep at the forefront of retail payments innovations, but the Bank of England is “clear-eyed” that central banks may have to intervene where commercial ones cannot or will not. He reiterated his commitment to preparations for a retail CBDC in case that becomes necessary: “We have not yet seen enough evidence that the innovation will happen in commercial banks.”
This sentiment stems from the fact that banks are supposed to adjust their business operations because, due to a shift in preference towards more digital and instantaneous methods of payments on the part of their customers, these customers have started treating them as less relevant. Bailey emphasized the relevance of money to keeping up with the evolution of needs, saying, “For commercial bank money to work effectively, it has to keep pace with the evolving needs of its users.” This statement brings into sharp focus the immediate necessity for banks either to innovate continuously or lose their competitive edge in the digital economy.
Proactive Monitoring of Developments
The Bank of England is, therefore, closely watching developments both in the nature of payment technologies and user preferences, a proactive interest in understanding the evolving landscape of finance. To use Bailey’s words, “Our work on retail CBDC is considering these trends in the payments landscape closely,” and the Central Bank was not working off some premise that there was any potential failure in the commercial banking sector but preparing for a future in which Bank of England CBDCs could figure importantly.
The ramifications are far-reaching yet profound for a central bank to enter the retail payments area. For one thing, a Bank of England CBDC would revolutionize the way that consumers interact with money-a state-backed, digital alternative to traditional banking. However, that is not the preferred outcome from Bailey, who signaled that while central banks should foster innovation, they certainly should not monopolize the space. “As central banks, we should be thoroughly engaged to encourage and, if necessary, provide such innovation – but there is no good reason to be proprietorial on this,” he said.
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