IFGS 2023: More “radical change” for payments on the horizon, BoE deputy governor says
On the theme of The Shape of Things to Come: Emerging Technologies and Trends at the Innovate Finance Global Summit 2023, Sir Jon Cunliffe, the deputy governor for the Bank of England for financial stability, outlined the central bank’s role amid a fast-changing payments landscape.
In a keynote speech, Cunliffe set out his stall, declaring that he wanted to focus on “how we pay for things and the money that we use to pay for things”.
Cunliffe says payments and transactions were, until relatively recently, “dusty corners” of financial services but are now evolving at speed. “And there’s good reason to believe that even more radical change is on the horizon,” he says.
The need for forecasting
Sir Jon Cunliffe, the deputy governor for the Bank of England for financial stability
Cunliffe says that despite gazing into the future being an integral part of the job for central banks, forecasting the pace and direction of technological innovation and, crucially, the way it’s going to interact with social and economic trends, is a “hazardous enterprise”. Nonetheless, the Bank of England’s responsibilities mean forecasting is essential.
The central bank is not just responsible for ensuring that payment systems work “seamlessly” and without disruption, “crucial for financial stability”, it is ultimately responsible for ensuring that money circulating in the UK is “robust and unified”.
“We have 800 private banks, building societies and credit unions issuing money,” Cunliffe explains.
He says users must have confidence that the money they hold will be usable and will be conducive to transactions. Money must also be denominated in the same currency and seamlessly exchangeable for any other money in circulation on demand and without loss of value.
Against this background, the Bank of England, charged with maintaining financial stability and the regulation of the financial system in the UK, must be forward-looking for two key reasons.
“While we can’t be certain how new technologies and social and economic trends will play out, we need to have thought through in advance how the risks might need to be managed,” Cunliffe explains.
Playing regulatory catch up with new technologies once they become established can be “very difficult”, Cunliffe says, pointing to experiences in recent years with big tech and social media platforms.
Secondly, Cunliffe says that the central bank’s regulatory approach, in its pursuit of innovation, efficiency, functionality and resilience, ensures that firms looking to innovate understand the risks as they develop their products.
“It also ensures that innovation is not competing simply by taking high risks,” he adds.
This approach is a “key element” behind the evolution, adoption and innovation in payments in the UK in recent years, whether that is faster payments, contactless payments, payment apps, challenger banks or open banking, all of which have “transformed the way we pay”, says Cunliffe.
Importantly, this has all stimulated the growth of the UK fintech sector, which is now the second largest in the world.
The future of money
“These changes have transformed not only the way people pay, but also the type of money they use,” Cunliffe says, outlining how there are now two types of money in circulation.
The first is public money issued by the Bank of England in the form of physical cash, and the second is private money issued by commercial banks in the form of electronic bank deposits.
Until relatively recently, Cunliffe explains, the great majority of everyday transactions in the UK were made in publicly issued money – notes and coins. “However, as the cost of electronic money transactions has come down, as their functionality has increased, and as our daily lives have become more digitalised, cash use has declined, and commercial bank electronic money has come to dominate payments in the UK,” he says. Now, only 15% of transactions used cash in the UK in 2021.
Despite this, the ability to transact in cash of course remains very important for a substantial segment of the population, and the Bank of England will continue to issue cash as long as there’s demand for it.
“But the recent history and trend away from physical money in the form of cash issued by us towards electronic money issued by the private sector banks is very clear,” Cunliffe says, and we should expect that trend to continue.
Cunliffe outlines how the digitalisation of everyday life and ongoing developments within existing payment systems, infrastructure and regulatory frameworks – such as a new real-time gross settlement system – are behind the pivot towards electronic money.
But perhaps most importantly, over the last decade, a set of new technologies have emerged which have been pioneered and refined in the cryptosphere, and which have the potential for further transformation in money and payments.
Whether stablecoins, the tokenisation of commercial bank deposits, the digital pound or wholesale central bank digital currencies (CBDCs), “the potential tokenisation of money and the development of new ways of transferring it has major implications for the Bank of England”, Cunliffe says.
