In this bonus episode of Tokenized, Simon Taylor, Head of Market Development @ Tempo is joined by Danny Russell, Head of Payments Innovation Technology @ Bank of England to discuss stablecoins, settlement, the Digital Pound Lab and more!
In this bonus episode of Tokenized, Simon Taylor, Head of Market Development @ Tempo is joined by Danny Russell, Head of Payments Innovation Technology @ Bank of England to discuss stablecoins, settlement, the Digital Pound Lab and more!
Timestamps:
***
This episode is brought to you by Visa
A world leader in digital payments, Visa is bridging the gap between traditional financial institutions and innovative blockchain networks, helping players in the payments ecosystem navigate the ever-evolving world of tokenized fiat currencies with confidence and ease. Learn more at visa.com/crypto.
***
We’d also like to remind you that the views or opinions of our contributors today are their own and do not necessarily reflect those of the companies they are representing. Nothing we say should be taken as tax, financial, investment or legal advice, do your own research!
Music by Henry McLean
Danny Russell 0:00
I forked usdcs contract and walked through it, line by line with one of the former deputy governors to actually show them this is what a stable coin is at a fundamental kind of level, right? It was interesting seeing how it works with existing payments and stuff like that as well.
Sy Taylor 0:22
I welcome to tokenized. The show focused on stable coins and the institutional adoption of tokenized real world assets. My name is Simon Taylor. I'm your host for today, author at FinTech brain food and head of market dev over at tempo. And joining me today is, well, an old industry friend, Danny Russell, also head of payments innovation technology at the Bank of England. How you doing? Danny, very good.
Danny Russell 0:49
Simon, thank you very much for having me. This is long time listener, first time caller. So very excited to be here.
Sy Taylor 0:54
Appreciate having you on and very excited to get into the work you're doing, because you get to look after all, the cool stuff that people don't really pay enough attention to that I find myself pointing at a lot. So we'll get into all of that, but just let me do the disclaimers first, reminding viewers and listeners that views and opinions of contributors today may be their own and might not reflect those of their employers. Please don't take anything we say as tax, financial, legal or investment advice, stay safe and do your research. And want to remind you that this show is also made possible by our friends at visa Danny. Talk to me. What is the DLT Innovation Challenge, the digital pound lab, the digital security sandbox and the synchronization lab, because those sound like words, but they do things. Yeah, it's very much,
Danny Russell 1:44
and that's Thank you very much for having me on here. I think that's what I'm really excited today to talk about, is just the sheer breadth of work that the Bank of England is doing around payments innovation, and particularly also with DLT. I don't think it's fully understood, appreciate just the breadth of what we're doing. So I think you've hit the four big ones on the head there, Simon. So let me go through those. I'll kind of group them into wholesale and retail. So I'll go through the wholesale ones first. The very first one there we've got is the digital security sandbox. This is a regulatory sandbox we're doing in conjunction with the FCA that actually tests and allows people to do in production with live the issuance and trading of digital securities. So we have got 16 firms in there. At the moment, it required a whole act of parliament to get going to support the regulation of this, and this is firms actually going through different gates to prove that they can actually up to a certain limit issue and trade securities live in the UK. When the sandbox ends in 2029 it won't just disappear. They will then be launched into a pilot regime as well. This is really important for us supporting it. You've also seen, in that respect, the digital guilt, or digit as it's known in the industry, also been just had their supplier chosen this last couple of months is all part of the work the bank UK is doing on digital trading as well. Within that as well, we have the synchronization lab. So for those who don't know the bank's core payment system, RTGS, settles 388 billion pounds of transactions per settlement day on average in January, right? And that's some serious, serious volume of payments. One of the things we're looking at exploring is that is the idea of synchronization. So it's basically you can put a little bit of funds away and earmarked away for, say, a housing transaction or something like that. And essentially, I know that we can support atomic settlement, so you can have the cash on one ledger, aka ours, which we're quite fond of, and two, then you can have the assets on another ledger as well to synchronize that. And the bank did some work called Project Meridian to actually demonstrate that again, for that sale of purchases and houses. They learned something similar with Project Meridian securities as well doing securities as well as FX, these large volumes of payments here. So that's the synchro lab that one's not live money that's kicking off this year. And we've got 18 firms in there across all things, including digital assets, house prices, all that kind of stuff. So testing it, what happens if you can get true atomicity between when the assets are on a different ledger, some centralized, some decentralized, and the money in the in the court, in the center, and because we'll come back to why we think that's really important for the bank as well. We've then got the DLT Innovation Challenge, which was asking the question of, so if your league of Synchro is having the money staying within the central bank, staying in the ledger that we've kept in order to preserve fragmentation, this is entering. The other question of, can you put wholesale central bank money on a ledger we don't control? Okay? And that was a challenge we ran last year again with the Bank of International Settlements Innovation Hub, and we looked at four key topics around settlement, finality, scalability, interoperability and network. Asset controlled firms, both HSBC, our traditional banks, as well as some internet native firms such as chainlink and AAVE Ava, and also the Scottish center for excellence in digital trust. It's quite a long one to fit out as well, and we can go through what we learned about those books. There's some stuff that's happening. You see a lot in DLT as well. Finally, the digital pound lab. So digital pound, for those that know, is a retail form of central bank money that we've been working on with the central bank for last couple of years. Our design phase is going to finish in 2026 and we're intending to publish a decision on whether or not we proceed to build this year as well. The Digital pound lab is the biggest experiment we've done. The Digital pound is creating a platform for the industry and us to co create use cases, and we're really testing that hypothesis of, can you get a set of small and coherent building blocks, things like aliases, programmability, verifiable credentials, and what kind of innovative use cases can you build upon that? We've just published some videos, some use case videos online. If you search for digital pound lab phase one update, or just digital pound lab, you'll find it as well. And we're in a process of going through Phase two applications now. So there's so much talk about Simon. I think I'll be here all day, but that was a whistle stop tour of all the work the bank is doing as well, and how it all relates as well. So yeah, really happy to talk about it here today.
Sy Taylor 6:23
So if I could start, I think one of the things in the digital security sandbox or the innovation challenge that people don't recognize is that the Bank of England is doing pioneering work for all of the central banks globally, in many cases, and sort of Can you settle a mortgage obligation or asset that doesn't exist anywhere near the central bank with central bank money in its real time, gross settlement. Nobody's done that. The Central Bank of England has tried it and is trying to prove that it's possible, and you can synchronize those things in your synchronization lab. I hope I got that one right, and the security sandbox. Again, people are like, Well, can we sell securities in the US? They're talking about the clarity act. Well, in the UK, yes you can. There's a sandbox for it. So you can do that now today, whereas Morgan Stanley is applying for National Trust charters in the US, you could do that now here and in the UK, and you could do it with pounds. So I think those things don't get enough attention. But what do you think is the coolest thing that the Bank of England is doing, and why?
Danny Russell 7:28
Well, that is such a an awkward question, because obviously I'm responsible for two of those, and two of those my colleagues are responsible for. So I've got to make sure I don't have which
Sy Taylor 7:36
is your favorite child, Danny, which is my
Danny Russell 7:38
favorite child? So I, I think the digital pound lab, my team, is going to be really surprisingly, saying this, because I talk about it every day, the digital pound lab is, I think, one of the ones I'm really most excited about, because part of my role is leading the technology design for digital pound as well as now the retail payments work that the Bank of England is doing as part of the national payments vision, delivery committee. I'm sorry to sign There's me lots of committee and acronym names today, and I'll try to write them all down. But it's, it's very, very governance heavy. But this is the thing that people can go after calls they're interested, and go and have a look at the videos and something really so simple, like even some things like, my favorite use case in the digital pound lab is digital checks, which everyone rolls their eyes at when they first see about it, right? But it's actually, it's what happens when you build, when you take things like verifiable credentials and modern APIs and common standards, if you do something really cool, and it's like, and it came from a really interesting use case, like where, unfortunately, my mother in law passed away, and we were wrapping up all of her accounts, and we had kept getting these checks for like, seven pounds from her energy provider and all this kind of stuff. And I was sitting in our kitchen island for ages ago, I couldn't cash that, and I can't work this out, so I should we were building the lab at that time, I had the idea of actually a check is just often we talk about a request to pay as and Simon, I send you a request to pay because I want you to pay me, right? But actually, this a check is a request to pay. Someone wants to pay you. They just don't have your details, right? They don't have the information they need to do that about you. So the idea of Digital Check is someone puts a message sheet. They might just have your email address or or a home address or a letter or something like that, or a phone number, and they send you this digitally signed packet, which could be wrapped up in a QR code or something like that. And in that has a, I guess, a challenge. It basically says, this is for Simon Taylor, and I want to pay him 10 pounds, right? And actually, what you do with your verifiable credential that you've got, Simon is you scan that with your phone. It's all digitally signed, so you make sure it's definitely from me and not from dodgy brothers fraudsters or anything like that, so you're not having any kind of fraud like that as well. And then you make a claim. Use your verify, because you go, I am Simon Taylor, this is my payment details. I would like to claim that check, and you could use any kind of. Criteria on top of that, and that's just really, really powerful way of how simple common standards can build use cases that people can use in every day. And that's really what the bank digital pound lab is about. So we've done that, we've done chat apps, we've got we've even done, if you people want to go have a look on the digital pound Lab website. Is we even did, okay, it's an NFT marketplace, but we're using that as a proxy for digital proxy for digital assets. So please don't thinking the bank's gone NFT crazy. But the fact is, we've used in that as well. We've used an online completely. It's on a hosted basis, so Ethereum based, and we've used a there's a digital marketplace on there. We're using nfts as a proxy for digital assets, and people go in, they can bid for them. They can make us a trade, and that, because we're using a Oracle called hyper ledger, CAC Tai, they can trigger a payment on chain and base it and have it appear in their off chain digital pound wallet for them to approve. Again, sign so you know who it is, you can approve it, make the payment on the digital pound lab ledger, and again, through that Oracle, is that transaction is then completed back on the basic ledger. And it created a really interesting challenge somewhere, actually, to speak to the development team, I needed to get them to slow it down and add some friction to the use case, because it was too smooth, and I was demoing people, and it was just working too quickly. There was no idea of what. People couldn't see. The fact that some quite complicated like, you know, it's happening on chain, and someone's Oracle's listening to it, they're comparing it, they're checking the signatures of like, I need everyone to slow it down a little bit so that, I think, is the stuff that's really important to us to show so obviously, digital pound lab is one of my favorites, not my favorites. You're not going to get me in trouble on that today, but I think that as I talk about all of them, but yeah, that is a really good example of a single, simple set of building blocks can build a whole heap of innovation. And applications for phase two are still open. Now, if you've got a use case you want to build on that, but either on chain or using digital pound
Sy Taylor 11:56
APIs, yeah, so the digital pound, I think, is important to say, when you said the offline wallet here, you're talking about something that is acceptable in a future state as cash, right? It would be potentially anywhere. And so this wallet is not something that's just to be used as a crypto wallet or an on chain wallet. It's something that can be used offline. I could walk into a shop I'm not even touching the internet, and I could potentially pay them just as I pay them cash. And I think that thing potentially is really powerful in order to pay and get paid into in your checks use case, and know that I'm getting paid, and I have all of these checks building up, and you know, I've got to walk into some branch somewhere to deal with them. If I have this wallet, I can just clear them as me and accept them into that it might be this central pot of money that is mine.
Danny Russell 12:46
Yeah, that's exactly right. So we did a design note on offline, so we're working out whether or not we need to do that or not. But that's the you're exactly right, is the one of the challenges with digital pound is it's got to be a platform both for everyday payments. So buying your milk, your bread, your coffee, your transport, your Tai as well as a platform for innovation. And that is a really challenging design space of how do you do the normal everyday as well as the futuristic? So how do you support things like agentic payments and stuff like that as well? We did do a lot of investigations on specific offline, so you've got no connectivity as well. And we've released a experiment note and design note around that we're still reserving our judgment we did the specific offline bit. But you're right. This is not a it's off chain in terms of it is a retail payment system that can support everyday payments as well as futuristic ones around agentic payments, as well as potentially supporting digital assets as well. So yeah, that's difference there. But yeah, some really cool use cases. I encourage everyone takes about 10 minutes to go through about eight videos. We've really kept it tight. So I definitely have a look
Sy Taylor 13:49
at that, trying to go for the shortest tension span. Theater. Very modern. Of you talk to me about the DLT innovation challenge, right? Because every time I speak to a banker, they're like, Yeah, this DLT stuff's interesting, but cut off times mean that, like, you can do anything you want with stable coins, but the money hasn't settled yet. I'm still waiting for the RTGS, I'm still waiting. So where did you get to with settlement finality and interoperating between digital assets and other ledgers and central bank money in the
Danny Russell 14:18
RTGS, yeah, it's look, it's a great question. I think that's the thing that we need to solve. Because, you know, these digital markets, and we're seeing the same thing with digital securities. A lot of me operate 24/7 right? And you're right. The current RTGS is not 24/7 it works business days. We're just looking at increasing its operating hours as well. But So the four deep dive topics, so the way the Innovation Challenge was constructed was we had a central question of, can wholesale central bank money go on a programmable ledger? And that's code for we want to support both centralized, decentralized, distributed. We don't want to kind of be too prescriptive on that. Can it go on a programmable ledger? What. The Bank of England doesn't control it, and it can do settlement. And we had four deep dive topics in the right settlement, finality, interoperability, network and asset control. And I think we also had scalability. That's a year. So settlement finale very important for central bankers. When you're talking about the kind of volumes of payments that I was talking about, there about $488 billion every single work day. It's really important that we know when a transaction goes through that we need it to have gone through and it's final. It can be reversed through processes, but we can't have that. What we saw, and we had the eight firms through this, like I said, I'm just gonna try. And we had Ava labs chain link and Ave circle digital asset, and KPMG hedera HSBC collider and rails and the Scottish center for excellence in digital trust, because I wanted to name those, because we intentionally tried to capture as broad a net as possible. We didn't want to go, here's a hosted Ethereum instance, and we would have learned just about that. We're like, Let's go as wide as possible. Because the industry is, I mean, I don't tell you this Simon is changing so fast and so many different approaches, and the bank doesn't want to be bound to one technology. It's why we use the word programmable ledger. We want to work out the how it all works together. So what we did see, though, is we did see a common theme come around finality, and that is around firms, kind of taking three approaches for finality, where people were trying to get through high throughput and really quick, deterministic finality, it was either having a reduced validator set. We saw that through hedera tempo, other blockchains that are available, Simon base certainly arc by circle as well, had a reduced validator set as well, which obviously reduces the amount of time it takes to get to finality, because you have less people as well. Also, a massive bit was choosing the consensus algorithm, so again, one that supported deterministic rather than probabilistic finality. That was, again, what people used to get through. And I think that is going to be a really interesting space to see over next couple of years is how that kind of competition between the probabilistic finalities of your ethereums and some of your other layer ones versus the more deterministic and what you need for payments is really interesting. And one of the things we started to see in this is maybe what you want for the asset is different to what you want for the payment, right? Like, maybe one of the things is my own personal opinion around was around the house transaction, right? If I ever had put my house purchase on on chain, I would probably want the most censorship resistant, highly resilient form site that people aren't going to come knock on the door and kick myself and my kids out. Right? Do I need that payment to be there forever? No, I probably just need proof that I paid, right? I don't need the money transaction be there forever. So maybe it is different. But then that's when it comes back to interoperability, right? And it's really hard. We talk about all of these things. Does not make any Lord of the ring references about the one chain to rule it all right? And we start to get very we're starting to see lots of fragmentation in chains, and this is why, again, bringing back the digital pound lab, and also for Synchro, and also for DSS, we're focusing on interoperability, right? It the bank does not want to play king maker in terms of a chain. We also think that it's going to be a whole lot of chain environment. So if you have a multi chain environment, you focus on operability, right? So what the different ways to do it? What are different ways? Whether it was an Oracle, way within the Japan lab, whether or not there's a kind of burn and mint strategy, we'll see, we'll say tokenized deposits, whether or not there's a bridge that, like we're interested in seeing chain link and Arve do, there's so many different other ways. So we're really keen on interoperability. How you secure that? Because that has also the benefits of not fragmenting the liquidity that central bank has here.
Sy Taylor 18:46
Interoperability is going to be key. I think, though, there might not be one chain to rule the role, and the practical reality is there are already more chains, and there will probably be more in the future. And so how do you how do you interoperate with that? I think it's going to be an emerging question. So very thoughtful points. Talk to me about stable coins. Where do they fit in your bigger picture here. Have you guys done anything with them on the technology side? Yeah.
Danny Russell 19:10
So we've got stable coins, right? So I could even say, personally, I forked usdcs contract and walked through it line by line with one of the former deputy governors to actually show them. This is what a stable coin is at a fundamental kind of level, right? That's interesting seeing how it works with existing payments and stuff like that as well. When it comes to systemic UK stable coins, which is what the Bank of England is responsible for regulating, obviously different part of the bank. So I won't go into much details here, but we've just had our consultation closed on the regulatory framework for systemic stable coins. The bank has adjusted its position based on feedback from the industry. You see, we're seeing that changing to backing assets and the lack of that as well. And the bank is intending to respond to the consultation rough in the same time frames as the FCA is doing it for non. Systemic stable coins, which I get, is kind of a bit of a funny distinction for those not in the industry about systemic versus non systemic. But I
Sy Taylor 20:06
think about it. If your folks remember the financial crisis, there was always that split of like, is this a systemic institution? Is it not? Is it too big to fail? Is it not? And as a sort of lay person shorthand, it's a helpful way, I find, to explain to people that there are stable coins that are really, really big, that could be something that you really, really care about as a central bank for your overall economy, and there are stable coins that are quite small, that maybe being in an FCA sandbox is the right place for you to be. You can make some smaller mistakes when you're smaller, but you can learn and get better as you get bigger. So there are two different points there about where that needs to be. So sorry, I just wanted to kind of add that
Danny Russell 20:46
metaphor, yeah, no. And look, it's a distinction that's not clear to people outside, and sometimes even not clear to people inside, around that right? And you can also some people can be systemic at launch. So finality, which is again, a DLT solution, which keeps central bank money on bus and settles it between people on a DLT as well. So again, massive volumes. They were deemed systemic at launch by the Treasury because of the sheer volumes of money there as well. But back for stable coins. Yes, we're looking at them. Yes, we're doing our consultation. We're gonna have a response to that very shortly, on that, but also some of the work we're doing on the digital security sandbox, where we're doing that live, actual live trading of assets the bank is considering what role stable coins can have in there. So although the bank has been very clear that we prefer settlement in central bank money, because it's the ultimate risk free asset, because we don't have an on chain version of central bank money. Yet we've had to allow in the digital security box settlement and commercial bank money. We've received feedback from prisons as well. They would like to use stable coins. We're investigating their role as well. So watch this space, and we'll have an update on that as well. I think, just to come back to Simon that point on why we care about liquidity fragmentation so much as the banks. It feels like a very to your point, a very niche point. But when you look at the volumes that the bank does, like I said that 380 8 billion pounds a day. We have this thing in the bank called the liquidity savings mechanism. And it's really, really simple thing, but it is basically when you submit a payment that's supposed to be even real time, you can say, has to be now, now, or just, can you put it in the little queue that just tries to net it out. And every two minutes the bank tries to net those out. And when we introduced this in 2013 we found out that just that every two minutes netting out some payments saved our RTGS members 20% liquidity over 24 hours, that's 75 billion pounds a day, they've saved in liquidity. And that's why we're interested in preserving liquidity fragmentation, because it has, like, a really monumental impact for how banks that people don't often quite realize.
Sy Taylor 22:56
That is the sound bite for the show perfect explanation of the liquidity savings mechanism. I've never heard anybody do it quite so well. And secondly, that real time is not necessarily something you want if you can have the appearance of real time. And as somebody using RTP in the UK, it makes sense that I've sent money and then two minutes later I get the notification somewhere else that it's arrived. So help me understand what consultations are out there. How do people get involved on what's coming from the bank that we should be paying attention to? Yeah, so the consultation
Danny Russell 23:29
for stable coins has closed. So that's that closed in a couple of weeks ago. So that is there as well. The Synchro lab, again, unfortunately, a lot of applications are closed, so we've got 18 firms in there as well. So that's gonna be happening this year as well. The digital pound, we're expecting to publish some fun around the middle of this year on our decisions as well. We did just publish our progress report last year, for those who wanted to speed run the last four years of my life. And the DL Innovation Challenge, we will be publishing a report on what happened there at the end of the year. And a lot of the stuff really, again, the really important stuff that we've got there as well is so much of what I spoke about, the use case around digital checks, or around payments and messaging or request to pays. None of that is actually specific to the fact it's central bank money or the asset itself a lot, has it come to do with what is a modern, next generation retail payment system, right? It sits on the top. It's common standards. It's, like I said, a verifiable credentials framework. It's aliasing. It's having some kind of programmability, like it's not about it only works for me if I'm on Bank A and not on Bank B, or, you know, it works for all of us, right? So, so much of that is we can take through the retail payments work, and the bank in its role on the retail payments infrastructure board, I'm on the design authority for the next gen retail system. So much of what we're doing there, we are taking across of this stuff is applicable from the digital pound work that we have done so and the experimentation. So I would say, please. To get involved in there, even if it's not for digital pound, it really is influencing the requirements and the work for retail payments. And we will, again, feels like just recording this happen just after I'm saying everything has just closed. We have just closed all the applications for engagement on retail payments as well. You will have a chance very shortly to respond to some more publications comes out as there as well. But the bank is publishing so much information, having so many engagement things. We really want to hear from industry about that. So please, while I think most things might just be closed, the exception Digital Panel lab now is so much still to get involved with.
Sy Taylor 25:33
There is indeed, and I think people don't realize quite how much the central bank is doing in the UK. They tend to reduce it down to a conversation about stable coins or their particular issue, but this is the country that invented and pioneered real time payments, bank to bank transfers. And it looks to me, anyway, like you're trying to pioneer a lot of other things. I mean, as you were talking there about the payments architecture of the future, I was thinking about PASS keys and the role of pass keys surely. Now, whenever I log into any online system with my password, which we know is not necessarily secure, it asks me if I'd like a pass key and to use my biometrics. That would be amazing. Could we move towards a pass key native payments infrastructure of tomorrow? So lots to come, for sure. So I want to thank everybody for watching and listening. Danny. If people want to find out more about you or the Bank of England, give me URLs.
Danny Russell 26:28
Where do people go? Yeah. So you can find me at Danny Russell on LinkedIn, or, similarly, search for digital pound lab or go to the Bank of England's web page. Actually, you can search for anything I spoke about, the digital security sandbox, the DLT innovation lab, the synchronization lab, or Synchro lab for short, or the digital pound as well. There's so much there on the Bank of England's website. To your point, we don't publish it a lot, but thank you very much for having us today and and hopefully it helps got the word out. Because, yeah, I'm very proud of the work we're doing here. I think there's a lot more than people realize.
Sy Taylor 27:00
Well, as a proud Brit, I'm very happy to shine a light on the good work you're doing, Danny and some of the folks at the bank, because, as I said, I think it gets reduced down too much, and people will be operating in digital asset markets. Tokenization is the future. It's coming, and it's interesting to see so much work is happening and so much work that is being taken by other banks and central banks around the world as being kind of world leading. So thank you so much as always, guys, reminder you can find me at sy Taylor on all of the socials. You find me on LinkedIn as Simon Taylor, or at FinTech, brain food.com or at tempo dot XYZ. And please, if you want more conversations like this, remember to like, subscribe, do all the things that people do when they're helping others find This show and we will catch you next time.