Bank of England governor Mark Carney. Picture: REUTERS
Bank of England governor Mark Carney. Picture: REUTERS

London/Zurich — Mark Carney’s embrace of the future of finance is setting the three-century-old Bank of England (BoE) apart from policy makers around the world.

The BoE governor is starting consultations on allowing new payment providers to hold reserves at the central bank. Granting access to ventures such as Facebook’s libra would be a significant change — at present, only commercial banks can place their deposits at the BoE overnight.

While Carney remains cautious, saying on Friday that there will be rules, his relatively open-minded approach contrasts with some of his peers. Officials from Washington to Canberra have heaped criticism and scepticism on libra, a digital currency known as a stablecoin [that is, a crypto-currency designed to minimise price volatility of the currency, relative to some “stable“ asset or basket of assets].

“We’ll set the ground rules, and the system will follow the rules or it won’t work. Welcome to the world of finance. There are rules,“ Carney told BBC Radio 4.

A number of Democrats on Capitol Hill swiftly criticised Facebook’s Tuesday announcement and called for additional scrutiny. Representative Maxine Waters, the chair of the House financial services committee, said she would conduct hearings and demanded that Facebook hit the pause button “until Congress and regulators have the opportunity to examine these issues and take action”.

French finance minister Bruno Le Maire said it’s “out of the question” that libra should become a sovereign currency. Australia’s central bank governor, Philip Lowe, said there’s a “lot of water under the bridge before Facebook’s proposal becomes something we’re using all the time”. Former European Central Bank (ECB) vice-president Vitor Constâncio called the initiative “unreliable and dangerous” on Twitter.

On Friday, France announced the creation of a task force under the auspices of the G7 countries to examine stablecoins, covering anti-money laundering issues and consumer protections.

PODCAST | Business Day Spotlight - Libra is not a cryptocurrency.

‘A host of new innovation’

Carney was also cautious on libra, which is backed by bank deposits, saying that if its global ambitions are realised it would be “systemically important” and must meet the highest standards of prudential regulation and consumer protection. “The BoE approaches libra with an open mind but not an open door. Unlike social media for which standards and regulations are being debated well after it has been adopted by billions of users, the terms of engagement for innovations such as libra must be adopted in advance of any launch.”

Still, his remarks highlight how his BoE has strived to keep up with banking technology. Last year, it gave fintech start-up TransferWise the same rights as retail banks to process payments as the first non-bank to hold an account in the BoE’s real time gross settlement system.

As recently as March, it said it was committed to embracing fintech to deliver its mission and is applying new technologies “to enhance its own capabilities.”

On Thursday, Carney said giving more firms access to its reserves could “empower a host of new innovation”. It would mean increased competition for traditional banks but could cut costs for domestic and cross-border payments.

He also said such a move could improve the transmission of monetary policy and help ensure continued financial stability in a fast-changing world. The growth of financial providers outside the traditional banking system — typically known as shadow banks — has become an increasing concern for policy makers tasked with keeping the financial system stable.

The governor cited USC as a potential innovation for financial markets. That’s a consortium that aims to issue digital tokens fully backed by central-bank money, allowing instant settlement of trades.

Stephen Jones, CEO of UK Finance, the lobby group for the banking industry, said innovation and competition were to be encouraged — but echoed Carney on the supervisory challenges. “Future regulation needs to be developed to deal with the changing way customers are banking,” he said. “While innovation solves problems it also brings new risks.”