Sir Jon Cunliffe delivered a speech on the future of the banking system and of cash payments.
He noted that the forms money takes in society change as the structure of economies changes, as the ways in which we transact change, as technology makes new forms possible. It follows therefore that the shift from physical cash to electronic transaction was not driven by any policy but as a consequence of technology providing more convenient ways for us to transact with each other.
The shift towards transacting in private commercial bank money has accelerated greatly in recent years partly because it is still not possible to transact in central bank money over the internet or by using a smartphone. As a result, cash use is declining fast in the UK. In 2008, 60% of payments were made in cash, by 2018 this had fallen to 28%, and has been predicted to drop to 9% of payments by 2028.
Technology, alongside changes to domestic and European regulations designed to foster competition and innovation, is also enabling a new set of players, in addition to banks and card companies, to provide transaction related services and ‘crypto-assets’. Technological innovation offers great opportunity. But it also poses some very important questions for the Bank of England (BoE), sitting at the centre of ‘money’ in the UK. The change also poses questions more broadly for the UK regulatory authorities, government and parliament.
Improving the current system
Regulatory change, such as the EU Payment Services Directives, the UK Open Banking reforms and the creation in the UK of an economic regulator for payments, the Payment Systems Regulator, has opened the payments industry up to more competition.
The current regulatory regime focuses on the banks and core payment systems that have traditionally performed most of the functions, the ‘chain of actions’, involved in making transactions. But as innovation and competition lengthen that chain of action and introduce more actors into it, the current regulatory framework does not capture the full ‘end to end’ risks in the chain.
Central Bank Digital Currencies?
The rapid decline of cash, the rapidly changing nature of payments and, potentially, of the assets used to make payments, raise the question of whether central banks should leverage new technologies to provide new electronic forms of central bank money – the creation of Central Bank-issued Digital Currencies (CBDC) – as a complement to existing physical banknotes?
Sir Jon Cunliffe believes the following will be key considerations of the BoE going forward:
- how will the BoE ensure the availability and acceptability of physical cash for as long as people want to use it?
- can the BoE ensure that money remains reliable and stable while taking the opportunity offered by technology to improve the efficiency, effectiveness and functionality of payments – that is money as a means of exchange?
- how should the BoE respond to completely new systems for holding and transferring value which work not in central bank or commercial bank money but a new form of asset – a ‘stablecoin’? Under what regulatory conditions should they be allowed to operate – if they are allowed to operate at all?
- if technology is able to offer new ways to store value and make transactions – two of the three core functions of money – where should the public-private sector boundary lie?