BoE exec warns of stability risks from shift to private settlement assets

The Bank of England is warning that failure to modernize central bank money could shift lump sum payments to private assets and potentially put financial stability at risk.

A failure to adapt central bank money to emerging technologies could push lump sum payments into private assets, threatening financial stability and undermining confidence in the state-backed currency, a Bank of England governor warns.

Speaking at Digital Assets Week in London, Sasha Mills, chief executive of financial market infrastructure at the Bank of England, warned that high-value swap activity could move from central bank money to private assets if technologies such as tokenised assets and programmable ledgers are not adopted. As stablecoins, they undermine the stability of the financial system.

“We have a low risk appetite for a significant shift from wholesale clearing in central bank money to private clearing assets (such as the use of stablecoins in wholesale transactions) because the settlement in central bank money is an anchor for return to the state.”

Sasha Mills

Striking a balance between innovations and risks

Mills also outlined the central bank’s ongoing efforts to modernize its infrastructure to support these innovations and highlighted the importance of the Financial Conduct Authority and the newly launched Digital Securities Sandbox, an initiative aimed at testing new technologies in a regulated environment.

However, he noted that the application of programmable ledgers in finance is “still relatively new” and therefore their implementation in critical financial markets “may be risky.” To mitigate such risks, Mills emphasized that the Bank of England decided to develop the Digital Securities Sandbox in several phases, with “limits being adjusted as firms meet higher standards of resilience”.

Mills also noted that the central bank is exploring how central bank money could interact with programmable ledgers, through a potential wholesale central bank digital currency. As part of this initiative, the Bank of England plans to run a series of trials using distributed ledger technology to assess their role in the evolving payments landscape.

To remain competitive globally, the Bank plans to test different use cases, functionalities and designs for wCBDCs and their integration. Although no specific timeline has been provided, the Bank is seeking public feedback on its approach, with responses expected by the end of October.