Bank of England pushes RTGS updates as it explores wholesale CBDC and synchronization

The Bank of England is proposing to experiment with a wholesale central bank digital currency (wCBDC) to update its real-time gross settlement (RTGS) system.

The Bank of England (BoE) announced the move in a discussion paper titled “The Bank of England’s Approach to Money and Payments Innovation,” in which it pledged to conduct a series of experiments within the next six months to examine wCBDC settlements in comparison to “synchronizing” non-CBDC central bank money using existing RTGS systems.

RTGS is a funds transfer system that allows for the immediate transfer of money and/or securities between banks. In the UK, the RTGS system is called Clearing House Automated Payment System (CHAPS). It is operated by the BoE and is used for high value transactions.

The BoE has been consulting on the CHAPS update since 2022. In February 2023, Roadmap for real-time gross settlement services after 2024The bank has proposed “synchronisation” as a possible solution to update its RTGS system, which suffered a highly publicised crash in early July.

“We proposed creating a generic interface to RTGS so that a wider range of ledgers could connect to RTGS and synchronize transactions. Synchronization would enable ‘atomic settlements,’ meaning that transfers of two assets are linked in such a way that one asset moves only if the other moves,” the roadmap reads.

Wholesale CBDCs are digital versions of national currencies used by banks and financial institutions for large transactions and settlements, providing an alternative to the current RTGS system, with 19 countries already piloting them.

Both Sync and wCBDC rely on distributed ledger technology (DLT), a system that records transactions across multiple computers or locations.

“Further work is needed to consider what role these innovations might play in banks’ future toolkits,” the BoE said in a July 30 discussion paper. “To inform this work, the Bank proposes an experimental programme to test the use cases, capabilities and anticipated designs of wCBDCs and synchronisations, and their relative merits.”

The report added that these experiments would ideally allow for an assessment of the relative operational risks and complexities of using the two technologies, and for exploring how different types of financial assets could best be represented on a digital ledger.

“This will help identify important ledger design considerations and aid future work around interoperability,” the discussion paper said. “Experiments can also be used to evaluate the scalability of different approaches.”

The BoE outlined five experiments. Three of them are testing delivery-versus-payment (DvP) transactions for securities. In these transactions, the delivery of the asset is conditional on the transfer of funds. Another experiment is on payment-versus-payment (PvP) transactions for foreign exchange. In these transactions, the settlement is made only in two currencies. Finally, there is an experiment using assets and multiple currencies on a single platform.

“We already know that syncing with wCBDCs can achieve atomicity of settlement for tokenized asset transactions. Given this, for experiments to add value, they need to explore all stages of a full financial market transaction (not just the settlement point),” the paper said.

The BoE has outlined three key outcomes it hopes to achieve through its experiment, with an ultimate goal:

• Central bank currencies should be aligned with technological developments in financial markets and should have the ability to support central bank currency settlement of tokenized wholesale transactions.
• Innovations in financial markets should be leveraged in ways that support financial stability and monetary policy objectives. The BoE said, “Tokenization can increase the efficiency and speed of post-trade processes, thereby securing liquidity and reducing settlement risks and costs in wholesale financial markets.”
• The UK’s financial markets infrastructure must remain at the forefront of financial development, including maintaining appropriate levels of interoperability with new DLT-based infrastructure.

Design of wCBDC

In addition to the planned experiments, the discussion paper provides insight into how the BoE is approaching the possible design of a UK wCBDC.

“Central banks have been providing wholesale central bank funds to commercial banks in digital form via RTGS accounts for decades. Given this, our starting point is that central bank funds generated in wCBDC and RTGS systems should be indistinguishable in their core economic characteristics. Any divergence between these two means of payment would undermine the unity of the currency and lead to the emergence of a dual-track currency system,” the paper stated.

He added that one thing that other central bank experiments have in common so far is that the “minting” of wCBDC tokens is not “digitally based.”

“Central bank currency units existed in the RTGS before being converted into tokenized form, which could then be exchanged on the DLT platform,” the BoE said.

Another key design question concerns the DLT platform on which wCBDC units are exchanged. Specifically, should this be a central bank-provided and controlled infrastructure or should it be controlled by another entity?

“Some central banks have minted wCBDC units for exchange on third-party platforms, creating dependency on the operational resilience of these platforms,” the paper argued.

This could suggest the BoE’s inclination toward infrastructure controlled by the banks themselves, although it did not explicitly state its preference.

The paper concludes its discussion of wCBDCs by emphasizing that “the broader functionality that a wCBDC could enable will ultimately depend on the design of the wCBDC.” The Bank welcomes comments from respondents to this discussion paper on what these capabilities might ideally include and how they might inform the design of a wCBDC.

Responses to this paper will be accepted until October 31, 2024.

Watch: Finding ways to use CBDC outside of digital currencies

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