Bank of England looks to update RTGS by exploring wholesale CBDC, synchronization

The central bank of the United Kingdom is proposing experimenting with a wholesale central bank digital currency (wCBDC) as it seeks to update its Real-Time Gross Settlement (RTGS) system.

Bank of England (BoE) announced the move in a discussion paper, titled “The Bank of England’s Approach to Innovation in Money and Payments.” Under this, the BoE promised to undertake a series of experiments within the next six months to examine wCBDC settlement compared to the “synchronization” of non-CBDC central bank money using the existing RTGS system.

RTGS is a fund transfer system that allows for the instantaneous transfer of money and/or securities between banks. In the U.K., the RTGS system is called the Clearing House Automated Payment System (CHAPS). It’s operated by the BoE and used for high-value transactions.

The BoE has been consulting on an update to CHAPS since 2022. In February 2023, in its Roadmap for the Real-Time Gross Settlement Service Beyond 2024, the bank proposed “synchronization” as a possible solution to updating its RTGS system, which suffered a well-publicized crash earlier in July.

“We proposed to create a generic interface into RTGS which would allow a wider range of ledgers to connect to RTGS to synchronise transactions. Synchronisation enables ‘atomic settlement’, which means linking the transfer of two assets in a way that one asset moves if and only if the other asset moves,” said the roadmap.

Wholesale CBDCs—digital versions of a country’s currency used by banks and financial institutions for large-scale transactions and settlements—offer another alternative to the current RTGS system, with 19 countries already piloting one.

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

In its July 30 discussion paper, the BoE argued that “further work is required to consider the respective roles these innovations might play in the Bank’s future toolkit. To inform this work, the Bank proposes a programme of experiments to test the use cases, functionalities and prospective designs of both wCBDC and synchronisation, and their relative merits.”

It added that these experiments would ideally assess the relative operational risk and complexity involved in using the two technologies and how different types of financial assets can best be represented on a digital ledger.

“This would help identify important ledger design considerations and inform later work around interoperability,” said the discussion paper. “The experiments should also allow us to assess the scalability of the different approaches.”

The BoE went on to outline five experiments, three of which would test delivery-versus-payment (DvP) transactions with securities, where delivery of the assets is conditional on the transfer of funds; one experiment with foreign exchange payment-versus-payment (PvP) transactions, where settlement is conditional on the presence of payments in both currencies; and lastly, an experiment using assets and multiple currencies on a single platform.

“We already know that both wCBDC and synchronization can achieve atomicity of settlement for tokenized asset transactions. Given this, for the experiments to add value, we would need to explore all steps across an entire financial market transaction (not just at the point of settlement),” said the paper.

In terms of its ultimate goal, the BoE set out three main outcomes it hopes to achieve from the experiments:

• Central bank money must keep pace with technological advances in financial markets and must be equipped with the functionality to support central bank money settlement of tokenized wholesale transactions;
• Innovations in financial markets must be harnessed in a way that supports financial stability and monetary policy objectives. “If tokenisation increases the efficiency and speed of post-trade processes, this could release liquidity and reduce settlement risk and cost in wholesale financial markets,” said the BoE;
• The U.K.’s financial market infrastructure must remain at the forefront of developments in finance, including maintaining an appropriate level of interoperability with new DLT-based infrastructure.

Design of a wCBDC

Outside of the planned experiments, the discussion paper also gave some insight into how the BoE is approaching the possible design of a U.K. wCBDC.

“Central banks have provided wholesale central bank money to commercial banks for several decades in digital form through RTGS accounts. Given this, our starting point is that wCBDC and the central bank money created by RTGS systems should be indistinguishable in their core economic characteristics. Deviation between these two means of payment would undermine the singleness of money and result in the emergence of a twin-tracked monetary system,” stated the paper.

It added that one commonality in experiments carried out by other central banks, to date, has been that the ‘minting’ of wCBDC tokens has not been ‘digitally native’.

“The units of central bank money existed in RTGS ahead of being converted into tokenised form so that they can be exchanged on a DLT platform,” said the BoE.

Another core design question related to the DLT platform on which wCBDC units are exchanged. Specifically, whether this should be an infrastructure provided and controlled by the central bank or another entity.

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

This may suggest an inclination from the BoE toward infrastructure controlled by the bank itself. However, it made no explicit comment on its preference.

The paper rounded off its discussion of wCBDCs by emphasizing that “the greater functionalities which wCBDC might enable would ultimately depend on the design of wCBDC. The Bank welcomes views from respondents to this discussion paper on what these functionalities might ideally include, and how they might inform wCBDC design.”

Responses to the paper are invited up to October 31, 2024.

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