UK Banks Not Waiting on CBDCs as Tokenized Asset Pilot Goes Ahead, But it’s Still Three Years Away

Key Takeaways

• Major players in the UK banking and financial sector are to begin testing the potential of tokenized bank deposits.
• Crypto and stablecoin regulations could be implemented by July 2024.
• Efforts to create a digital pound CBDC remain ongoing.

Under the umbrella of the UK Finance trade association’s Regulated Liability Network (RLN), several of the nation’s largest banks and financial entities are to begin experimenting with tokenized bank deposits.

The UK government and central bank are scrambling to regulate crypto and stablecoins. Not only that, but they are also trying to implement a Central Bank Digital Currency (CBDC) as part of the UK’s “Crypto Hub”. Meanwhile, UK businesses appear to be leading the innovation charge.

Tokenized Bank Deposits

On April 15 2024, the RLN announced  it had begun entered into a new phase of trials in the UK. It also said it was expanding its pilot to tokenize bank deposits.

This aims to explore the benefits such a system could deliver to customers, businesses, “and the wider economy”. It does this by focusing on three use cases that could give users more ways to manage payments, mitigate fraud, and enhance settlement capabilities.

Namely, these use cases  are

• “Payment-upon-delivery” for physical products, which could reduce online marketplace fraud.
• The “process of buying a home”, again to mitigate fraud and improve consumer transparency.
• “A digital bond settlement, to connect digital customer money to digital assets.”

Eleven of the largest financial entities in the UK including Barclays, NatWest, Mastercard, and Visa, have joined the pilot. Meanwhile, blockchain and crypto firms R3 and Quant are its technology partners.

According to UK Finance, these use cases will test RLN’s ability to handle different forms of money, which includes tokenized deposits. The experimentation phase will run through until the end of the summer, when UK Finance will publish the results.

UK Converges on Crypto

With physical payments in decline, the UK RLN  is an initiative that has, since 2022, set out to explore the potential of what it describes as “disjointed” and still “nascent” blockchain technology and digital currencies.

The project will assess customer and business benefits through its exploration of the technology’s foundational capabilities. Furthermore, it will also evaluate the legal and regulatory frameworks to see how they apply to the operation of a shared ledger settlement system, which includes tokenized deposits.

This aligns with the Bank for International Settlements’ (BIS) “Project Agorá” and Bank of England’s (BoE) “Project Rosalind”, which is testing an application programming interface (API) for a proposed digital pound CBDC  with one of the chosen RLN tech partners, Quant.

UK Finance intends to expand participation in the pilot to fintech startups as well as other tech companies in July 2024, giving them the chance to test new tokenized solutions and products.

The news comes as the UK gears up to implement sweeping crypto laws and regulations that could see it achieve its desired status as a “Crypto Hub”, however the timeline for their implementation could stifle any tangible innovation due to this uncertainty.

Can the UK Capitalize on the RLN?

This is a promising development, but the RLN experiment, which could continue to run for years to come, is beholden to whether or not UK authorities manage to establish clear rules for crypto and blockchain.

Speaking at the Innovate Finance Global Summit (IFGS) 2024, the UK’s Economic Secretary to the Treasury, Bim Afolami, revealed  the government’s intentions to present a regulatory framework for crypto and stablecoins by July 2024.

Afolami noted the government’s aims to find the balance between innovation and consumer protection, a common thread amongst regulators. He also highlights that the UK Treasury is putting together final proposals that cover stablecoin and crypto staking, saying :

“Once it goes live, a whole host of crypto asset activities, including operating in exchange, taking custody of customer assets and other things, will come within the regulator perimeter for the first time.”

However, these promises may fall short as these efforts to regulate the industry have been exceedingly slow. They also appear to be playing catch up with other jurisdictions who are now implementing major crypto regulations this year.

With regards to the industry seeming to appear ahead of the government, UK Finance told CCN:

“The financial services industry is constantly innovating and is becoming increasingly digitised while providing more choice for consumers. This is all being done within a framework laid out by government and regulators and the financial services sector is at the forefront of work here”

Adding,

“To support this we think the government should push for global leadership in digital assets and tokenisation and have urged them to pursue issuance of a digital gilt.”

UK Election Year

A key factor that could determine the success of these ambitions is the looming general election that could see the sitting government replaced by the end of the year.

Prime Minister Rishi Sunak and his Conservative government, are declining massively in popularity. Therefore, the odds are that these regulatory efforts are scuppered by the election drive. A possible landslide defeat may also draw energy away from desires to legislate on crypto effectively.

Perhaps the writing on the wall is that private companies and trade associations are leading the UK’s innovation charge while the government grapples with a recession, a cost of living crisis, and several major by-election defeats.