Bank of England Prepares for CBDC if Commercial Banks Fail to Innovate

If commercial banks don’t provide retail payments innovation, central banks should be prepared to offer a retail central bank digital currency (CBDC), Bank of England Governor Andrew Bailey said Saturday (Oct. 26).

In a speech given at the Group of Thirty’s Annual International Banking Seminar in Washington, Bailey said commercial banks are the best home for innovation, according to a copy of the speech posted by the Bank of England.

“But if for some reason innovation is unlikely to happen, then the central banks have to decide whether they are the only game in town,” Bailey said. “For me, this justifies why we must continue to prepare for retail CBDC.”

It is widely believed that there is a need to modernize some payments practices to improveefficiency and reduce cost in both domestic and cross-border payments, and in both wholesale and retail payments, Bailey said.

“There is a particularly pressing need in the area of cross-border payments, where progress on modernization continues to be slow,” Bailey said. “Here more needs to be achieved on speed, cost, transparency and access to cross-border payments.”

Digital technology provides an opportunity to provide benefits like the automatic release of funds when goods are delivered and the wider use of encryption technology to prevent fraud, Bailey said.

Structural factors like the concentration of market power could stand in the way of the use of this technology, meaning commercial banks could fail to meet the needs of users, Bailey said.

“Our work on retail CBDC is considering these trends in the payments landscape closely,” Bailey said. “Absent innovation in commercial bank money, central banks may be left as the only game in town insofar as retail payments innovation is concerned. That is not my preferred outcome, but not one that we should rule out.”

The Bank of England said in April that it was exploring whether to issue a retail CBDC.

Sarah Breeden, deputy governor for financial stability at the Bank of England, said April 15 that the central bank had not made a decision on whether to do so.

“But preparatory work is prudent to ensure the option to issue is available if needed,” Breeden said.