The UK government took its time to adopt the jet engine. Its inventor, Frank Whittle, believed that improvements to the piston and propellor engines that dominated aircraft propulsion were firmly limited in the performance they could produce because of their complexity.
He conceived of the simpler and more powerful jet propulsion system, but it was many years before the UK government woke up to the innovation and adopted it. Today, it powers the vast majority of aircraft.
Can we draw an analogy to payments? Perhaps. Our payments system is complicated and, like the piston and propellor systems, involves many components and moving parts. Coordinating these components requires many participants to amend and reconcile their records and often recipients wait a day or more for their money. This complexity, with its own risks and costs, is also largely abstracted from the end user.
The question we face is: how much further can these complex systems be developed to improve performance and keep up with the increasing digitalisation and automation of our lives? Are they, like the piston and propellor systems, facing a ceiling on performance improvements?
The jet engine, in this analogy, might be the developments loosely referred to as ‘tokenisation’ – a process that enables the encrypted representation of money and other assets in digital form, integrated with code that governs their use, transfer and ownership.
One conception of this would be the ‘unified ledger’ – a single record to which all parties have access and on which transactions in a variety of assets, including money, are recorded. Such a system would support ‘atomic settlement’, allowing two parties to simultaneously exchange delivery of an asset with payment without using a central trusted intermediary.
This has obvious applications in wholesale markets, but there are use cases for retail as well. Imagine paying for an Amazon package when the package is photographed by the delivery driver on your geolocated doorstep, but not before.
This kind of technology is opening up new ways of representing money and assets, but will it be the future of all types of payments? Or will existing systems, or upgraded versions thereof, remain the more appropriate choice for some categories of payments, much as the piston engine has remained preferable to the jet engine for road transport.
Forecasting technological progress and adoption is perilous, but we should acknowledge that there is not, as yet, extensive real evidence that tokenisation can work robustly at the necessary very large scale to deliver the claimed benefits in the economy at large. Without forecasting, I will make a few general observations.
First, development of existing payment systems, both wholesale and retail, is not exhausted, as Whittle described development of piston engines when developing the jet engine. Central banks are introducing greater capabilities into existing payment systems, which may support more automation of payment services and enable a much wider set of players to interact with the central bank ledger. Bringing faster or instant payment systems to peer-to-peer and point of sale is an example.
The development of application programming interfaces is allowing systems to talk to each other more easily. The Open Banking protocol offers great scope for improving cross-border payments.
It is unlikely that one new system will replace our existing variety of payment systems. Newer systems will come in at different speeds for different use cases and ensuring interoperability will be key.
Second, while tokenisation requires money to be represented in a different form, it does not require new types of money. We should distinguish between the settlement asset – money used for payments – and the systems for transferring it and recording changes of ownership.
Stablecoins, issued by non-banks have been important developments in the crypto world, but the tokenisation approach can just as well be applied to commercial bank deposits and central bank money.
Third, the technology does open up the possibility of new entrants with different business models and the possibility of greater competition for provision of payment services and in the issuance of money.
Whether we allow non-banks to issue tokenised money is a policy, rather than a technical question. In the UK, the Bank of England has proposed a framework designed to ensure stablecoins are as resilient as commercial bank money, and to ensure they preserve the singleness of money.
Fourth, the tokenisation of wholesale financial transactions in capital and currency markets is likely to be the first to see the widespread use of tokenisation, but it would be a mistake to ignore the promise that tokenisation has nothing to offer retail. Consider the example of the Amazon parcel for one.
Finally, public authorities, whether by action or inaction, will have a major impact on the future of payments. Their regulatory decisions will go beyond tokenisation approaches. The rapid evolution of digital payment systems, which has enabled new cross-border trade activity, has left behind regulation and supervision capacity as well as the development of robust international standards. As a result, cross-border payments still have a great deal of friction. Tokenised payment systems are no exception to this.
Regulation matters not just for operation risk and consumer protection, but also for stimulating competition and directing innovation. It’s interesting to note that take-up of faster payment services is stronger in jurisdictions that allow non-banks direct access to central bank payment rails.
There is a range of possible ways in which central banks might embrace tokenisation of cash and these questions touch on some fundamental issues. Should the public have a right to the safest money in the economy – central bank-issued money? Does the ability of citizens to exchange privately issued monies for central bank money, at par and on demand, underpin public confidence in money? Would a publicly operated CBDC platform open to bank and non-bank payment service providers stimulate competition and innovation in payments? The answers to these will differ between jurisdictions.
Frank Whittle needed private venture capital to develop the jet engine and the UK government only adopted it many years later. In payments, the situation is very different. Policy-makers are enormously engaged with the sector’s trajectory.
I have tried to set out some of the considerations that are likely to shape the future payments landscape rather than trying to forecast any particular future. There is one thing, however, that I think I can predict with some certainty. More, and more extensive, change is coming.
Jon Cunliffe is former Deputy Governor for Financial Stability, Bank of England and former Chair of the Bank for International Settlements Committee on Payments and Market Infrastructures.
