CryptoUK and Members Respond to the Bank of England “Approach to Innovations in Money and Payments” Discussion Paper
CryptoUK (“CUK”, “we”) and its members welcome the opportunity to comment on the Discussion Paper regarding the Bank of England’s approach to innovations in money and payments. CUK is the UK’s self-regulatory trade association representing the cryptoasset sector. Our members comprise over 150 of the leading companies across the sector.
In responding to the Discussion Paper, we set out the views of our members and others in the community. We seek to offer pragmatic and relevant suggestions as to how we believe the Bank of England (“BoE”) could approach the questions and topics raised.
Discussion Questions:
1. Are there areas in which programmable platforms, including those enabled by DLT might bring significant benefits and risks in payments and settlement?
We support and agree that the areas noted in Section 2.2 are the likely and key enhancements to efficiency and financial stability that would result from greater use of programmable ledgers in financial markets, and in particular:
- consolidation of functions can reduce back-office processes and the need for manual reconciliation, reducing the cost of fees paid to intermediaries;
- greater standardisation, and the ability to highlight fractions of high-value assets (such as units in investment funds or part of a real estate asset), could increase the pool of potential investors for those assets and hence their liquidity; and
- automation could also speed up settlement processes – facilitating same-day settlement. As a result, credit risk exposures between counterparties in these transactions would be lower. Collateral requirements would also fall as a result, freeing up assets for other uses.
We support the above precisely because these are some of the most important areas for improvement in the existing, traditional financial systems and how they currently operate. Among other benefits, we see the possibility of gains in access to capital opportunities by small to medium enterprises, who are normally priced out of capital markets due to cost and efficiency restrictions. By including these enhancements, the pool of participants within the ecosystem increases, and in turn this can further enhance the UK’s economic growth.
As such, we would strongly encourage determined responses from the BoE and other UK regulators to actually effectuate these. We understand and support the need to provide a controlled environment and set of experiments to ensure they will work as expected in these areas.
2. How likely are programmable platforms, including those enabled by DLT, to be taken up at scale by wholesale financial markets?
The likelihood of take up by wholesale financial markets would depend on the environment in which these platforms would be operating. Since a broad scope of cryptoassets are captured under the MLRs many firms will need to consider whether additional licensing is required, which is not an easy task. The likelihood would then be reliant on how practical it would be for firms to actually be able to take this up at scale and complete any additional licensing processes. A fast track process for authorised firms, or those that wish to participate in initiatives like these, would help expedite this process.
Stablecoins in particular are tried and tested and could be used in terms of the fiat elements of payments as is already the case in some jurisdictions. We recommend that the BoE open up this opportunity to give the UK a competitive advantage as well as serve as an example of the UK leading in this important area. Along with this suggestion, it is also important to keep interoperability in mind. Although possibly out of scope for the BoE initially, multi-country projects such as Project mBridge highlight the importance of thinking through cross-border functionality at the onset.
3. What are respondents’ views on the pace of innovation in private money – in particular, commercial bank money – used in retail payments?
We believe the pace of innovation is clearly strongest in the crypto asset payments infrastructure and technology. Transactions settle across borders and time zones on a 24/7 basis with real-time or near to real-time efficiency and effectiveness.
Currently, securities settle at T+2 in the UK, and the US has only just recently moved to T+1.
The UK published the Accelerated Settlement Taskforce Report (March 2024) which seems to suggest T+1 in the UK to be achieved closer to 2027. Separately, a core Real-Time Gross Settlement (RTGS) engine was to be introduced in the UK 2024, but at this date appears to still be under development.
Traditional finance is still behind crypto asset payments, and the UK is behind even within traditional finance. Clearly, this pace of innovation is inadequate within traditional finance, and especially within the UK.
As such, we recommend that the BoE and other UK regulators truly seek to learn from and adapt from the incredible innovations provided by DLT and other related emerging technologies. They have accomplished in a matter of years what it has taken decades for the traditional finance to only approach (given that crypto asset settlement, even globally can be done in real-time or near real-time).
Further, sophisticated functionalities already exist within the DLT and digital assets space that enable and streamline the back office functions and needs. We would encourage further understanding and actual examination of those in detail. Many of our members work in this space, and we would be happy to facilitate discussions with the BoE and UK regulators that demonstrate the incredible tools and work that are already available.
Finally, the finalisation of a UK regulatory framework for crypto assets and stablecoins is key. Draft rules have been published for a while and on pause and we would encourage more visibility on timings. Without this improved visibility it is difficult for the industry to prepare for any pace of innovation and growth. The US is looking at implementing stablecoin regulation pretty quickly, moving from T+2 to this stage in a short space of time, and the UK is still floundering and delayed.
While we applaud the work and research already conducted by the BoE, this is a critical missing piece at this time, and we encourage the new government to progress it at pace. UK Growth is losing out due to the multiple barriers to entry and growth in comparison to other jurisdictions – this needs to be considered from a growth perspective.
4. What are respondents’ views on the wholesale infrastructure that might support retail payments innovations, including to ensure that singleness of money can be maintained across stablecoins and tokenised deposits?
No answer.
5. What are the risks and benefits from the use of: a) tokenised deposits; and b) stablecoins for wholesale transactions?
The benefits of tokenised deposits include:
- Reduced costs including operational and transactional costs.
- Increased efficiency including instantaneous and frictionless transfers and exchanges on a DLT without the delays and errors that can occur in traditional systems.
- Enhanced security with developments such as tokenised identity/ identity validation can help to reduce payment fraud on an industry wider basis.
The benefits of stablecoins include:
- They have been tried and tested and have been shown to work efficiently and to minimise risk as compared with many traditional payment rails and settings.
- They enhance cross-border payments’ efficiency and transparency.
We also recommend that any analysis of stablecoins both highlight and differentiate between the different types of stablecoins (the current definition in para 2.3.2 does not make a clear distinction). For example, there can be very important differences in risk, depending on whether the stablecoin is algorithmic or not.
With respect to risks and challenges, taxation is still a matter of some importance and potential confusion. Tokenisatoin of any real-world asset may lead to different taxation or financial reporting outcomes than that of the underlying asset. Stablecoin use can have serious tax reporting ramifications in many jurisdictions, and very much so in the UK. When used for payments, their use becomes a tax reporting event (even if no tax is due). Most crypto or digital assets are treated as property, which, while consistent with current tax law in many jurisdictions, can be a source of confusion for a typical taxpayer. For accountancy purposes, there are similar challenges whereby most crypto assets are classified as intangible assets, regardless of their economic use case. This can lead, in some cases, to the need to report purchases with crypto assets as a barter transaction.
6. Are there innovations that could support central bank money being equipped with the requisite functionality to ensure safe settlement in light of technological advances in financial markets?
We note that already high-functioning examples exist of real-time and near real-time settlement of crypto asset payments and transfers, including across borders. This particular area is of high importance precisely because of the risk and frictions and costs that remain and have remained for decades within traditional payments and transactions with the biggest improvement potentially being to T+1 in some parts of the world (although not in the UK at present).
In light of the innovations already present with DLT use cases, T+1 settlements should not be the goal, but rather, the goal should be a true real-time or near real-time settlement, especially with non-complex financial transactions. The BoE has already done work and testing on this, so we would encourage a continuation of this work and testing, with the publication of these results as soon as possible.
7. What are respondents’ views on potential functionalities of a wCBDC and how might these inform wCBDC design?
Supportive of wCBDC for commercial bank transactions only.
8. Will the proposed programme of experiments help to assess these potential functionalities for central bank money?
We would support a clear programme that includes DLT experimentation and a goal of near real-time settlement, including globally, and T+1 for retail and wholesale participants. These experiments should include examination of the existing tools in the digital assets space that greatly enhance back office function and lower costs dramatically (as noted in our answer to Q3).
The Digital Securities Sandbox is an excellent way to move innovation ahead. One caveat is that the final requirements do not permit the testing of e-money or stablecoins as part of the transactions. We have commented elsewhere and wish to reiterate here that we believe that to be a mistake that will hinder innovation and experimentation in the areas described in this Discussion Paper.
We acknowledge the advancements already made through the Faster Payments System that was world-leading when it was introduced in 2008. We encourage the UK to seek to be at the forefront globally on the current issues and areas in this Discussion Paper. In order to be at the forefront of speed (with risks well controlled), stablecoins will be preferable. At present the BoE expects that payment transactions be conducted in central bank money. This expectation may hinder the UK’s ability to lead globally (as it has done in the past) on “faster payments”.
9. What are respondents’ views on the outcomes that the Bank seeks in retail payments and how can they be reflected in practical questions currently facing policymakers and industry?
We support all of the policy outcomes noted in 4.3.1. We further note and support the fact that the UK needs to work in concert with and informed by other global jurisdictions to ensure that the policy outcomes are achieved. We encourage a leading-edge mentality as we noted was demonstrated in the Faster Payment System in 2008.
