Money and payments: a
'black ships' moment?
speech by Jon Cunliffe
Given at the Economics of Payments XII Conference at the Federal
Reserve Board, Washington DC
Published on 26 October 2023
In his final speech as Deputy Governor for Financial Stability, Jon Cunliffe recalls
Facebook's announcement in 2019 that it was launching a digital currency. He
discusses the three areas where this galvanised more urgent action by authorities.
First, the G20 roadmap to improve cross-border payments. Second, the Bank of
England's exploration of a central bank digital currency. Third, the regulation in the
UK of systemic payment systems using stablecoins.
Speech
It is difficult to overstate the importance of the announcement by Facebook in June 2019 that it
intended to launch a multicurrency stablecoin, a new digital currency called Libra for general
cross-border payment use. Indeed, one commentator has likened the impact of the Libra
announcement on central banks to the sudden arrival off Tokyo harbour in 1853 of the 'black ships
of evil appearance' - a modern, irresistible US fleet - that led quickly to the collapse of a
centuries-old ruling system and to the opening up of Japan.[1]
For the previous decade, central banks and financial regulators had been watching, with a wary
eye, the development of crypto-asset markets, using new technologies, outside the conventional
financial system. Many, like the Bank of England, had dipped a toe into the experimental water,
running small experiments with these new technologies with the aim of understanding them and
their possible use cases better. Some financial firms had gone further, exploring and investing in
limited use cases within wholesale financial services.
And regulators, increasingly fretful about the cocktail of risks in unregulated crypto-asset markets
- risks ranging from illicit finance to consumer harms and, potentially, to financial stability - had
been debating whether and how to bring 'crypto' activities within regulation.
But the Libra announcement and the potential appearance of a new form of money, using new
technology and moving between countries on new rails outside the current system, galvanised
central banks and regulators into much more urgent action on a number of fronts.
I want to talk today about three of those fronts: the G20 roadmap to improve cross-border
payments; the Bank of England's exploration of the Digital Pound, a central bank digital currency;
and the regulation in the UK of systemic payment systems using 'digital settlement assets' like
stablecoins.
I will talk about the first wearing my hat as Chair of the Bank for International Settlements'
Committee on Payments and Market Infrastructures (CPMI) and co-chair of the Financial Stability
Board's Cross-Border Payments Coordination Group (CPC), and about the second and third
wearing my Bank of England hat. I will of course be giving up both hats next week when my Bank
of England term finishes, so this is really my parting shot.
Cross-border payments
The Libra project raised significant regulatory and financial stability concerns, leading to swift
statements from both the G7 and G20 that "no global stablecoin project should begin operation
until the legal, regulatory and oversight challenges and risks... are adequately addressed".[2]
But the project, and the benefits it claimed it could deliver, also shone a light on the cost, speed,
reliability and availability of cross-border payment systems - a long-neglected corner of the
international financial system. Central banks, finance ministries and regulatory authorities realised
quickly that they could not simply focus on the risks that new players and new technologies might
bring; they needed also to understand and, if possible, address the shortcomings in the existing,
less risky systems that created such opportunities for new technologies and new players.
And shortcomings there certainly were. In contrast to the improvements in domestic payment
systems that were increasingly being seen in many jurisdictions, cross-border payments were
slow, expensive and unreliable. Removing frictions in wholesale, retail and remittance payments
across borders could both yield substantive economic benefits and improve access for millions to
the international financial system.[3]
So in February 2020, G20 Finance Ministers and Central Bank Governors tasked the FSB, CPMI
and others to develop a roadmap to enhance global cross-border payments.[4]
Work by FSB and CPMI revealed that this was not a simple problem, amenable to one or two
quick solutions, but rather a complex set of interlocking frictions, both in the public and private
sector, exacerbated by weak competition. Moreover, while there were common themes, there was
also substantial variation by payment types and by region and jurisdiction. The CPMI produced a
comprehensive list of the necessary action areas, the so-called 'building blocks', covering
infrastructure, data, regulation and competition, and these formed the basis of the FSB's roadmap
of actions adopted by G20 leaders in the autumn of 2020.[5]
So, three years on, as I pass the CPMI baton on to Fabio Panetta, the incoming governor of the
Bank of Italy, it is fair to ask: "How are we doing, and what are the priorities for the future?"
We have built a strong, detailed, analytical foundation for the work. From 2021 to 2023, the CPMI
and FSB produced a number of reports, analysing the key frictions and the actions for the public
and private sector, in partnership, that are necessary to alleviate them. We have set out best
practice where it exists and practical guidance on how to make changes in key areas.
Equally important, the G20 Leaders adopted in 2021 quantitative targets for improvement by
2027.[6] These cover speed, cost, access and transparency for wholesale, retail and remittance
payments.
As we all know, 'what gets measured, gets done'. So, equally importantly, we have established the
mechanisms and the data collection that will enable us to measure progress towards the targets.
The first annual monitoring report against the targets was delivered to G20 Finance Ministers and
Central Bank Governors in Marrakesh two weeks ago.[7]
While the data are not perfect and there are important gaps we need to address, we are now able
not only to measure how far we have to go but also to identify more precisely the areas for action
that are likely to yield the greatest improvement.
We have started to see some concrete improvements. Since 2020, some countries have
expanded access to their payments infrastructure to a wider range of financial institutions, or
expanded their operating hours. Payment systems in more than 100 jurisdictions are already
actively using the ISO 20022 messaging standard, which can carry far more information and so
reduce payment failures. CPMI and the private sector have now developed harmonised data
requirements for these cross-border payment messages, which will prevent fragmentation.[8]
Finally, a number of projects in Asia are showing the real benefits that can be achieved by
interlinking fast payment systems.[9]
However, as the monitoring report shows, we are significantly short of the targets for 2027. In
general, on the main targets, we are between half and two thirds of the way there. That is not
surprising perhaps, given we are halfway through the roadmap period. But, though achievable,
given the timescales for investment and other action, it is a challenging distance to travel in four
years.
So, in short, we have built a strong foundation for the work, including quantitative targets for 2027
and the machinery to monitor progress. We are starting to see some real improvements. But there
is a long way to go, and it will need continued investment by the public and private sectors in
infrastructure and data and regulatory changes.
As I said at the outset, both the frictions and the actions necessary to achieve them vary
considerably by payment type and by region. But there are some common priority areas on which
we will need to focus in the next phase of the work.
First, we need to see further upgrades to central bank and private sector payment systems. More
than a dozen countries are developing and upgrading their real-time gross settlement (RTGS)
systems over the next five years, for instance by expanding access or extending operating hours.
As an individual cross-border payment will often involve systems operated by both public and
private sector institutions, the CPMI has launched a joint public-private sector taskforce to
coordinate plans for the necessary improvements and ensure they coalesce around best
practices.[10]
Second, we need to implement the data standards for cross-border ISO 20022 payment
messages and develop harmonised standards for application programming interfaces (APIs).
Third, we should facilitate and promote interlinking of fast payment systems. There are a range of
technological solutions available or in prospect.[11] But the governance and oversight of
interlinking arrangements can be a greater challenge than the technology. CPMI is working on a
report to the G20 next year on these governance and oversight issues that could serve as a useful
reference for payment system owners and overseers, and it published an interim report for
comment last week.[12]
Fourth, we should pursue more effective, coordinated regulatory frameworks for cross-border
payments, and remove unnecessary regulatory frictions. A key priority on regulation in the near-
term will be for the Financial Action Task Force (FATF), in the first half of next year, to update their
recommendation (which was originally developed 20 years ago) on detecting and preventing
misuse of wire transfers by terrorists and other criminals. A more granular recommendation, which
takes into account new data standards and technology, will enable more consistent
implementation across jurisdictions and enhance both the efficiency and the effectiveness of
AML/CFT checks. In addition to FATF's work here, there are a range of other frictions arising from
the regulation of banks and non-banks, and a second public-private taskforce is focused on
identifying actions to address these.[13]
Fifth, we should support authorities beyond the G20 in addressing cross-border payment frictions.
This month's progress report shows that the biggest frictions, not surprisingly, are in lower income
regions such as Sub-Saharan Africa, and addressing these could bring transformative economic
benefits. The IMF and World Bank are developing their programmes of technical assistance to
support authorities in these countries.
And finally, we need to enhance competition and innovation. Currently, in most jurisdictions, only
banks have access to domestic payment systems and central banks' RTGS systems - leading to
weak competition, especially as the number of active correspondent banks worldwide fell by
approximately 30% between 2011 and 2022. Even where non-bank payment service providers
can have direct access to payment systems, existing legal or regulatory barriers, or the high costs
of direct access, prevent them from doing so. The CPMI has set out a framework of best practices
to enable countries to review the access arrangements of their key payment systems.[14]
It is perhaps this lack of access to payment rails operated by incumbents, and the need to use
settlement assets provided by incumbents, that has helped to stimulate the exploration by
potential challengers, like the Libra project, of new rails and new settlement assets using new
technologies.
The Libra project, of course, after much work and much modification, fell by the wayside last year.
The stumbling blocks appear to have been regulatory rather than technical. However, though
perhaps more muted, interest in using new technologies to develop new forms of settlement asset
and new payment rails for use in the real economy - outside the world of crypto-asset markets -
has not gone away.[15] The recent launch of the PayPal/Paxos stablecoin arrangement is one
example.
These new technologies purport to offer improvements in speed, cost and reliability, all of which
would make them attractive for cross-border use, and exploring their potential has therefore been
included in the G20's roadmap. However, these technologies also purport to offer new
'functionality' for money and payments that may make them competitive for domestic use - even in
advanced jurisdictions that have developed sophisticated payment systems.
Technological advances have throughout history led to changes in the forms of money we use
because they have made money easier and more convenient to use. The shift from physical cash
to electronic payments that we have seen over the past decade has not occurred because people
have lost confidence in cash.[16] Rather, it has happened because it has become more convenient
and because physical cash cannot be used for internet commerce.
And small reductions in frictions and small increases in functionality matter, as the shift towards
using mobile phones rather than cards at point-of-sale demonstrates.[17]
The technologies that are loosely grouped under the broad heading of 'tokenisation' -
cryptography, distributed ledger, atomic settlement, blockchain, fractionalisation and
programmability - enable new ways of representing money that allow for greater automation of the
transfer of money and the deeper integration of that transfer - the payment - into other processes.
While these technologies have been pioneered in crypto-asset markets, they could significantly
transform everyday payments in the real economy, as I will discuss later.
One cannot of course say with certainty that it will be possible to deploy such technologies at scale
for general use in the economy or that users will value and adopt the new functionalities. But it
would be very unwise in my view to bet, as some seem to do, that we have reached the end of
developments in payments and money - especially given the increasing and rapid digitalisation
and automation of the processes of everyday life.
And this brings me to the other two areas of action that were accelerated by the announcement of
the Libra project four years ago - the exploration of central bank digital currencies and the
regulation of private sector firms that propose to use those technologies to create new forms of
money like stablecoins and new payment systems for general use in the economy.
The Digital Pound
First, I will say a little about where we are in the UK on the possibility of introducing a retail CBDC,
the 'Digital Pound'.
In February this year, the Bank of England and HM Treasury issued a consultation paper on the
design of a Digital Pound.[18] The consultation paper did not propose the introduction of the
Digital Pound. No decision has been taken to do that in the UK. Rather, the paper concluded that
current trends and technological advances in payments - the trends I have been discussing -
made it likely that a Digital Pound would be needed by the end of the decade. The paper set out
and invited comments on the detailed model of the Digital Pound we proposed to explore and test
in the next stage of our work, prior to a decision in two to three years' time on whether or not to
implement it.
We envisage the Digital Pound as a partnership with the private sector - a so-called 'platform
model'. The Bank would provide the Digital Pound and the central infrastructure, including the
'core ledger'. Private sector firms - which could be banks or approved non-bank firms - would
provide the interface between the Bank's central infrastructure and users by offering wallets and
payment services. These private companies would be able to integrate and programme the
Digital Pound, as the settlement asset, into the services they would offer to wallet holders.
The consultation paper offered two main motivations for the possible future introduction of the
Digital Pound. The first is the most relevant to central banks. It concerns the role played by state
money issued by the central bank to the general public in anchoring confidence in money and in
supporting the singleness of money - the interchangeability of all monies, public and private, that
circulate in the economy on demand and at par value.
The only form of state money available to the public at present - physical cash - is declining in
use and usability. And as the Libra announcement highlighted, new, non-bank players could
potentially exploit technological advance to offer new forms of money and new payment systems
and services. Against this backdrop, my view is that it is likely to be necessary to issue central
bank money in digital form to support confidence in money, particularly in stress, and to ensure the
singleness of money.
The second motivation concerns competition and innovation. While relevant to central banks, it is
more a motivation for governments. Digital marketplaces, as we have learned, have a tendency to
concentration as, of course, do payment systems.[19] This can be a barrier to competition and
innovation, with the risk of new entrants wanting to offer new payment services being tied to
particular private issuers of digital money and their payment systems. This may be a
particular concern if 'big tech' firms enter more deeply into payments and money. Competition and
innovation may therefore be enhanced by providing a public alternative, a public digital money
platform that allows private firms to offer services exploiting the new functionalities I have
mentioned.
The Bank of England and HM Treasury consultation paper has stimulated a strong response, with
over 50,000 completed responses. The responses fall into two broad categories. The majority
express general, high-level concerns about three broad issues - privacy, programmability and the
decline of cash. The second, smaller category of responses comprises detailed comments on the
proposed platform model and some other key design features, including the limits that have been
proposed at least for the Digital Pound's introductory period.
We expect to publish a detailed response to the consultation in the coming months addressing
both types of response. I do not want to anticipate that, but it is possible to make a few key
observations on the consultation.
On the first category of response, the consultation document made clear that, under the proposed
model, neither the government nor the Bank of England would see individuals' data. Rather,
private sector payment firms would be the interface with the user, handling user information in the
way banks do today. Users would have at least the same, if not greater, protection of their privacy
that they enjoy today when they make electronic payments. We also made a commitment that
neither government nor the Bank would programme the Digital Pound or constrain the uses to
which it could be put. It would be for private sector firms to develop and offer, for user consent,
payment services involving greater programmability.
As regards cash, the Government recently legislated to ensure the availability of physical cash to
those who prefer to use it and the Bank has made clear that it will provide physical cash as long
as there is any demand for it.
The responses to the consultation illustrate the importance of these key issues. It is clear that
public confidence in our approach will be essential, if a future decision were taken to introduce the
Digital Pound. During the design phase, we will develop the strongest possible protections in
these areas, and the government has committed to introducing primary legislation before
launching a Digital Pound.[20]
On the second category of response, there is general support for the model of the Digital Pound
we propose to explore and test further. There are, however, differing views on some key aspects,
particularly the limits that we propose would apply, at least initially, to prevent rapid, destabilising
changes to the banking system that could have financial stability implications. Some question the
need for limits, while banks in particular are concerned about the impact of CBDC on their deposit
bases and on financial stability. And on use cases, while merchants, fintechs and payment
services firms appear supportive of the possibilities, others, particularly banks, are more sceptical
that attractive use cases will be developed for a retail Digital Pound.
We are still in the process of the detailed analysis of all of the responses and, as I say, we aim to
respond comprehensively in the coming months. But I would observe, if only a little tongue in
cheek, that criticisms of the Digital Pound have ranged from concerns that it would be adopted at
a scale and pace that would disintermediate the banking system and threaten financial stability, to,
at the same time, concerns that there would be no use for it and it would be a 'solution looking for
a problem'.
Not surprisingly, as an institution charged with maintaining financial stability, we take the first point
very seriously. Modelled estimates suggest that even with a very high level of take-up, the impact
over time on the banking system should be manageable.[21]
But these can only be estimates. We cannot know in advance the behavioural response of users
to a Digital Pound, i.e. the scale and speed of take-up by households and firms. That is why we
have proposed that, initially at any rate, were we to introduce a Digital Pound, there would need to
be limits on holdings. During the next phase of development, and in advance of any decision on
whether to introduce a Digital Pound, we would seek to refine, in the light of available evidence,
our estimates of possible take-up and the consequent calibration of limits.
The second concern perhaps risks missing the point. I am reminded a little of Henry Ford, who is
reported to have said that had he asked people what innovation they wanted, they would have
asked for faster horses. Were we to decide to introduce the Digital Pound, the objective would not
be to target some particular failing or identifiable use case not available in current payment
systems. Rather, it would be to create a public sector platform using public sector money that
private payment services firms could use to exploit the greater functionality in money and
payments that technology may now offer in an increasingly digitalised world.
Experimentation by a variety of private sector firms on a platform developed by the Bank of
England and Bank for International Settlements' Innovation Hub provides some initial support for
the view that with a relatively small range of technical features, a Digital Pound could support a
very wide range of payments use cases.[22]
While it might be possible to deliver some of the use cases through specific programming of
existing payment systems using commercial bank money, there are clearly material advantages in
a general purpose platform and digital settlement asset that can be used and configured relatively
simply, consistently and cheaply for a broad range of uses cases.
In the next phase of the work, we will work more intensively with the private sector to explore
possible use cases for a Digital Pound and the technological design necessary to create the best
platform for innovation. At the same time, we and HM Treasury will consult more widely to
stimulate a national conversation on the Digital Pound.
Stablecoins
Similarly, it would be possible for the private sector to use these new technologies to create
infrastructures and issue private money for general use in the economy. Indeed, that is precisely
what the Libra project proposed - initially as a multi-currency basket stablecoin and subsequently
as a dollar stablecoin.[23]
This brings me to the third front on which the Libra project galvanised action - the development of
international standards and domestic regulatory frameworks for stablecoins. To be clear, although
stablecoins, whose value is linked to a fiat currency, have developed as the settlement asset and
store of value in crypto-asset markets, the motivations behind these regulatory initiatives should
not be seen primarily as an attempt to regulate the Wild West of highly speculative crypto markets.
I should say at this point that there is in my view a strong case for regulation of those markets, to
protect investors, ensure market integrity and prevent their use for illicit finance. Indeed, in the UK,
regulation has recently been extended to cover the marketing of crypto-assets, to ensure
promotions are clear, fair and not misleading to retail investors.[24] And HM Treasury have
consulted on the other key elements of a comprehensive crypto-asset regulatory regime, including
regulation of the exchanges that provide the access to crypto markets - often, as we saw in the
case of FTX, bundled with a range of other services and activities.[25]
However, the regulatory initiatives that followed the Libra announcement have been directed
primarily not at crypto-asset markets but rather stablecoins that could be used a means of
payment in the real economy, both for cross-border and domestic use.
Thus in 2022, CPMI-IOSCO, the international standard setting body for payment systems and
market infrastructure, issued guidance on the application to stablecoins of the international
standards for systemic payment systems.[26] In much the same way, the FSB issued High-Level
Recommendations on 'global stablecoins' in 2023.[27]
Both effectively set standards for some of the unique features of payment systems using
stablecoins, including not just the mechanism for the transfer of coins but also the need for the
coinholder to have a clear claim on the issuer and the requirement for the issuer to be able to
repay that claim, when requested, in fiat money at par value by the end of the day.
International standards of course are only effective if implemented by jurisdictions in legislation
and regulation. Many jurisdictions, not least the United States, are currently wrestling with the
question of how to extend their regulatory regimes to stablecoins and to crypto-assets more
generally.
A number of jurisdictions, however, have legislated to bring stablecoins used for payments within
the regulatory framework.[28] In the UK, the Financial Services and Markets Act passed by
Parliament earlier this year gave the Bank of England power to regulate systemic payment
systems using 'digital settlement assets' (including stablecoins). The Act therefore extends the
Bank of England's existing powers to regulate conventional systemic payment systems. The
Financial Conduct Authority (FCA) will regulate the issuance and custody of stablecoins for
conduct and market integrity purposes.
The Bank expects very soon to issue a Discussion Paper setting out its proposed regulatory
regime for systemic retail payment systems using stablecoins.[29] I am not able to set out the
proposed regime in detail today. But I would like to explain how we have approached the key
issues and how we see this new regulatory regime fitting in alongside other regulatory regimes to
avoid regulatory arbitrage.
First, and perhaps most obviously, is the question of why? Do we really need new forms of money
issued by new players moving on new payment rails?
This is essentially the same question as I discussed earlier in the context of the Digital Pound.
And much of the answer is the same. While it is not certain that these technologies will actually
deliver the innovation and competition in payment services some have claimed, we do not want to
prevent such innovation, provided - and this is a very, very important "provided" - the risks can be
managed to the same degree as equivalent risks are managed both for existing systemic
payment systems and for the commercial bank money they use as a settlement asset.
There may well be some players who attempt to operate outside regulation. But setting out clearly
the regulatory framework will enable those players who wish to innovate sustainably and
responsibly to build the necessary management of risks into their business models and
technology.
Second, I have said that our approach is to ensure that risks are managed to the same degree as
equivalent risks are managed for existing payment systems and for the private, commercial bank
money they transfer. This is an important elaboration of the fundamental principle of "same risk,
same regulation".
It may not be possible, for technological or other reasons, to apply the current regulation for
systemic payment systems and banks to systemic payment systems using stablecoins. It will, for
example, be impossible to provide collective insurance akin to bank deposit protection, initially at
any rate, as unlike for banks there is no broader industry among which to share the costs of a
payout. In order therefore to achieve the necessary level of protection of the coin holders' claim,
and so protection against run risk, there will need to be more robust requirements in other areas,
especially, but not only, in the requirements for the backing assets. In that respect, the Financial
Policy Committee of the Bank of England judged in 2022 that, to manage systemic risks, the
backing assets should be high quality and liquid - either deposits at the Bank of England or very
highly liquid securities.[30] The lack of deposit protection also has implications for the nature and
enforceability of the coin holders' claim.[31]
Third, we will require a legal entity that can be identified as the payment system operator and held
responsible for the end-to-end management of risks. Stablecoin payment systems can be
structured in many different ways, including arrangements where the issuance of the coin, the
transfer of the coin and the storage of the coin (the wallets) are performed by separate entities. It
is not clear that use of public, permissionless transfer mechanisms, at least with current
technology, would be consistent with this requirement. But our regime will be designed to be
flexible and accommodate different structures insofar as that can achieved with the necessary
management of risks.
Fourth, as with the Digital Pound, we cannot know in advance the speed and scale of adoption of
such new forms of money and payments. We need therefore to be alive to possible financial
stability risks from rapid transitions that could impact the stability of the banking system. For the
Digital Pound, we have proposed limits, initially at any rate, to manage the risk, and it would make
sense to take a similar approach to stablecoins.
Finally, we will aim to ensure clarity on regulatory boundaries and the business models that fit
within them. The proposed regulatory regime is a payment system regime intended to enable
innovation in payments. It is intended for business models focussed on generating revenues from
payment services. Business models that are focused on earning revenues from maturity and
liquidity transformation - the return on the assets backing the liquid, money-like claims they issue
- pose risks that are more appropriately regulated within the banking regime. Likewise, business
models that use stablecoins to represent claims on investment products, and which do not
guarantee redemption at par, are not suitable for use in payment systems and need to be
regulated under an investment regime.
Innovation using new technologies is not confined to new entrants. Banks, whose business model
depends in part on issuing liquid liabilities (bank deposits) for payments use, may well want to use
new technologies to tokenise and transfer bank deposits.[32] This would fall under the existing
banking regime rather than the proposed regime for payment systems using stablecoins. There
are a number of issues concerning the issuance and transfer of bank deposits in tokenised form
that will need to be considered by bank regulators and banks themselves, including whether such
tokens should be permitted to circulate freely like digital banknotes.[33] But the underlying nature
of the claim, deposit protection and management of risks should be regulated in the banking
regime.
Banks may also want to issue stablecoins under the proposed new regime. In that case however,
our view is that they should be issued out of a separate, bankruptcy remote, legal entity with
different branding, to avoid confusion among consumers and so avoid contagion in a stress
between different forms of money.
Conclusion
I am often asked, "what do central banks do?" Or, a more penetrating question - usually from
schoolchildren: "what is the Bank of England for?"
Rather than give them the long list of Bank of England functions - monetary policy, financial
st