responding to leaps in payments : from unbundling to stablecoins christina segal - knowles1 executive director financial market infrastructure directorate westminster business forum thursday 22 january 2020 i would like to thank holly snaith, michaela costello, rachel james and josh sadler for their assistance with preparing this speech. all speeches are available online at www. bankofengland. co. uk / news / speeches good morning. i would like to thank the westminster business forum for inviting me to speak at today ’ s seminar on ‘ payments policy and regulation - infrastructure, innovation and end - user priorities ’. i ’ d like to start today by telling two short ( and seemingly unrelated ) stories. the first is the story of perhaps the first giant leap forward in payments – the introduction of paper money. paper money was invented in china as early as the tenth century. merchants seeking to avoid carrying around heavy iron coins began issuing ious written on mulberry bark. the state eventually took over – outlawing private ious and banning counterfeit – and the first state - backed currency was born. when marco polo arrived in the mid thirteenth century, he was so amazed by this invention that he devoted an entire chapter of the marvels of the world to kublai khan ’ s tree bark money. but, the first big leap forward in payments ultimately ended in a leap backwards. by the mid - fifteenth century, china had eliminated paper money entirely. the state had issued too much money and counterfeit was rife. ultimately, mismanagement of the new invention resulted in what was perhaps the world ’ s first hyperinflation. china didn ’ t adopt paper money again for several hundred years. although paper money eventually made a comeback, it took generations. the second story i would like to tell is a bit more mundane : the story of my breakfast. on the way to this conference, i stopped to get a coffee and paid for it by tapping my phone against an ipad. of the other people in line in the busy coffee shop, not a single one paid in cash – everyone was tapping cards or phones. the story of my breakfast won ’ t be a surprise to most of you – indeed card payments have become the norm in many parts of the uk. the proportion of uk payments made with cash has fallen from 60 % in 2008 to 28 % just ten years later. this of course has implications for financial inclusion, which i won ’ t cover today as i don ’ t have time to

pursuit of price stability was appropriate ; this flexibility was usually incorporated explicitly into central bank mandates in one way or another. 6. asset markets were thought to be efficient at distributing and pricing risk and financial innovations were normally welfare enhancing. while asset prices might be subject to bouts of “ exuberance ” on the part of investors, there was little that monetary policy could do about them. the best monetary policy could was to limit the fallout when sentiment turned. 7. systemic financial crises were seen only in history books and emerging markets ; they were unlikely to happen in advanced economies with their developed and wellregulated financial markets. moreover, price stability and financial stability were natural bedfellows, the successful achievement of one facilitating the attainment of the other. of course, agreement with each and every element of this consensus was not universal. the european central bank, for instance, continued to place great value on the usefulness of a monetary pillar. and, as discussed below, there were some who believed that central banks should also use their constrained discretion to lean against incipient asset - price bubbles and credit growth. but the set of beliefs above were, we believe, held sufficiently widely in policymaking and academic circles to be described as a consensus. in the rest of this paper, we re - visit some aspects of this consensus in the light of the crisis. it is not possible to cover all the elements of the consensus, though we shall offer some more wide - ranging observations at the end. in particular, we focus on : whether the experience with unorthodox policies during the crisis has changed our view of the appropriate policy instruments in normal times ; whether the target rate of inflation should be increased or a shift to price - level targeting is warranted ; and what the experience of the crisis has taught us about how monetary policy should respond to credit / asset - price booms. 1 as a precursor to some of these themes already figured in the contributions to the conference held here eleven years ago. that discussion, however, we ask whether monetary policy decisions contributed materially to the crisis. 2. monetary policy and the crisis it is worth stressing at the outset that a multitude of factors, both microeconomic and macroeconomic, played into the crisis. a non - exhaustive list of microeconomic factors includes : the incentive to shift loans off banks ’ balance sheets to avoid capital requirements ; the reduced incentive for care in the origination of loans, when those loans are then securitised ;