Bank of England's Preparation for the Tokenization Revolution in Finance

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Tokenization is a pross of creating a digital representation of an asset on a blockchain. This can bring many advantages, such as improved liquidity, clarity, effectiveness and safety. Tokenization can also enable new forms of money and payments, such as stablecoins and central bank digital currencies (CBDCs).

The Bank of England (BoE), the UK's monetary authority is well informed of the opportunities and difficulties of tokenization. In a keynote speech at the Innovate Finance Global Summit on 17 April 2023 Sir Jon Cunliffe, Deputy Governor for Financial Stability of the BoE outlined the four areas where the BoE is exploring tokenization:

• Stablecoins for payments: These are digital tokens that aim to maintain a stable value by being backed by or linked to another asset, such as fiat currency or gold. Cunliffe said that stablecoins could offer greater efficiency and functionality in payments, but they also pose significant risks to consumers and financial stability. He said that stablecoins should meet the same standards of robustness and consistency as commercial bank money and existing payment systems. He also said that there may need to be limits initially on the use of major stablecoins for payments until they are properly regulated.

• Tokenization of commercial bank deposits: These are digital tokens that represent deposits held at commercial banks. Cunliffe said that tokenization could allow bank deposits to better compete with non-bank payment currencies, such as stablecoins. However, he also mentioned that there are regulatory aspects to think about, such as deposit safeguard and anti-money laundering steps. He said that tokenized bank deposits would be liquidated without the involvement of central bank money, unlike current commercial bank liquidations.

• Creation of a digital pound: This is a CBDC, which is a digital version of central bank money that could be utilized by households and businesses for payments. Cunliffe stated that a digital pound would probably be required if the current patterns in payments and money persist. He said that a digital pound would play an anchoring role in the economy in the same way that cash now does and would allow a wide range of innovators to access a platform. He also said that mechanisms could be created to ensure that wholesale tokenized transactions could be settled in central bank money thanks to a digital pound, which would again contribute to financial stability.

• Ensuring these new forms of money are robust and uniform: This is about ensuring that tokenized transactions are synchronized with the BoE's real-time payments system, which is currently being updated. Cunliffe said that this would enable faster and cheaper settlement of tokenized transactions.

The BoE is not alone in its interest in tokenization. Other central banks around the world are also exploring the opportunities and challenges of CBDCs and stablecoins. For example, the US Federal Reserve has recently announced the creation of FedNow, a new instant payment system that could support tokenized transactions.

Tokenization is a rapidly evolving field that could have profound implications for finance and society. The BoE is preparing for a greater role of tokenization in finance by conducting research engaging with stakeholders and developing regulation. As Cunliffe stated, "We need to make sure that we are receptive but not permissive."

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