The Bank of England is set to embark on a groundbreaking experimental program involving its Real-Time Gross Settlement (RTGS) system and wholesale central bank digital currency (wCBDC). Announced in a recent discussion paper, the initiative aims to assess the settlement capacity and interoperability of these technologies. The central bank plans to conduct these experiments over the next six months, focusing on the effectiveness of CBDC settlement compared to non-CBDC central bank money synchronization, as previously tried in Project Meridian.
The Bank of England’s exploration of distributed ledger technology (DLT) is approached with caution. According to news sources, the central bank acknowledges that the potential impact of programmable platforms on monetary and financial stability remains uncertain. The Bank of England emphasizes the need to remain vigilant against a “failure of imagination” regarding yet-to-emerge DLT use cases that could influence market adoption.
“Our programme of experiments would be grounded in a set of policy outcomes which we seek from innovations in wholesale central bank money,” the bank said in the discussion paper. “The programme would cover both wCBDC (wholesale CBDC) and synchronization, as well as the relative merits of these two approaches.”
According to reports, the BoE is currently revamping its RTGS system, CHAPS, which is expected to debut in the coming months after experiencing a crash in July. This overhaul is part of the central bank’s broader efforts to enhance the financial system’s resilience and efficiency.
The experimental program outlined by the Bank of England includes five distinct tests. Three of these tests will focus on delivery-versus-payment (DvP) transactions involving securities, where asset delivery is contingent upon fund transfer. These experiments will build on the findings of Project Meridian, progressively increasing in complexity.
In addition to DvP transactions, the Bank of England plans to experiment with foreign exchange payment-versus-payment (PvP) transactions. In these transactions, settlement depends on the presence of payments in both currencies. The BoE is already testing PvP transactions with a synchronization network as part of the extension of Project Meridian. Now, it proposes to use a wCBDC modeled on Banque de France for these transactions.
The final experiment will involve testing the use of assets and multiple currencies on a single platform, potentially within Project Agora. This ambitious endeavor aims to explore the interoperability of various digital assets and currencies in a unified system.
Bank of England: Objectives and Implications of Experiments
The discussion paper also raises important design questions. Notably, previous experiments with wCBDC have minted CBDC from existing RTGS currency rather than minting it “natively.” Additionally, the platform on which the CBDC is minted may be controlled by the central bank or a third party, raising concerns about the system’s resilience if reliant on external infrastructure.
The Bank of England’s cautious yet innovative approach reflects its commitment to safeguarding financial stability while exploring new technologies. The central bank’s experiments with DLT and wCBDC are part of a broader effort to modernize the financial system and ensure it remains robust and adaptable in the face of evolving technological advancements.
By integrating these technologies into its RTGS system, the BoE aims to enhance the efficiency and security of financial transactions. The experiments will provide valuable insights into the potential benefits and challenges of implementing DLT and wCBDC at scale.
As the Bank of England moves forward with these experiments, it remains focused on its primary objectives of maintaining monetary and financial stability. The central bank’s prudent approach underscores the importance of thorough testing and evaluation before any widespread adoption of new technologies.
In conclusion, the Bank of England’s upcoming experiments with distributed ledger technology and wholesale central bank digital currency represent a significant step toward the future of financial transactions. By carefully assessing the settlement capacity and interoperability of these technologies, the BoE aims to enhance the resilience and efficiency of the financial system. These experiments will provide critical insights into the potential impact of DLT and wCBDC, ensuring that the Bank of England remains at the forefront of financial innovation while safeguarding stability and security.
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