The Future of Money and Payments: speech by Andrew Bailey

Speech by Andrew Bailey, Governor of the Bank of England, at Group of Thirty's 39th Annual International Banking Seminar, Washington

The Bank of England's approach to retail payments begins with an open stance toward both central bank money and commercial bank money. While there may not be a strong need to anchor retail payments solely in central bank money, this does not imply a diminished need for cash. We remain committed to supplying cash as long as the public desires it, and current evidence suggests that demand is still present. Therefore, cash will continue to be available.

Turning to the wholesale payment landscape and payment system settlement, the role of central bank money becomes more significant. Unlike retail payments, high-value wholesale payments and settlements rely on reserve accounts maintained at central banks, which are directly backed by the state. This makes central bank money the core liquid asset and, effectively, the anchor of the banking system. Thus, while we may adopt a neutral stance toward the medium used for retail payments, wholesale payments and settlements require central bank money to maintain stability.

The Bank of England is also heavily invested in promoting digital innovation within the wholesale sector. By enabling digital advancements, we can support the system's anchor in central bank money while upholding our objectives of monetary and financial stability. Our recent Discussion Paper delves further into this area, detailing experiments that include a tokenized digital form of central bank money.

On the topic of retail payments, it's essential to ask whether economic considerations support an indifference between central and commercial bank money. From my perspective, maintaining a balance between the two is preferable. Commercial banks, after all, use their funds to extend credit directly to consumers, a role central banks do not fulfill. Shifting this balance could potentially complicate the credit system due to the interdependence of commercial bank lending and fractional reserve banking, which relies on the singleness of money.

Furthermore, we must consider whether digital payments in the retail space necessitate a Central Bank Digital Currency (CBDC). In principle, I believe that innovation within commercial bank money is the ideal pathway for retail payments. However, if commercial banks cannot sufficiently innovate, central banks may need to step in as the primary drivers of change. For this reason, preparing for the possibility of a retail CBDC remains a prudent step, as commercial banks have not yet provided convincing evidence of progress in retail payments innovation.

The potential for innovation stagnation raises concerns. For money to effectively serve as a medium of exchange, two elements are crucial: the "train," representing the economic claim (typically tied to commercial banks), and the "rails," representing the technology or infrastructure enabling exchanges. Historically, barriers such as market power concentrations have hindered innovation in payment infrastructures. It is critical to address these structural issues to ensure that commercial bank money meets the evolving needs of its users. Absent sufficient innovation in commercial bank money, central banks may find themselves the primary facilitators of retail payment advancements. While this is not my preferred outcome, it remains a possibility that cannot be dismissed.

In conclusion, I extend my gratitude to Sarah Breeden, Victoria Cleland, Karen Jude, Nick Maclaren, Harsh Mehta, and Ali Moussavi for their invaluable assistance in preparing these remarks. Thank you.