On Monday (April 19), the Bank of England published a policy for the use of omnibus accounts with the central bank’s real-time gross settlement (RTGS) system.
It laid out how approved payment system operators will be able to co-mingle the funds of multiple financial services entities in a single central bank account, enabling those firms’ payments to be settled round the clock in central bank money – beyond the working day availability of the standard RTGS system.
The announcement has been greeted with particular enthusiasm by providers of virtual currency and blockchain-based payments, which see the new system as clearing a path towards direct participation in central bank settlement.
Fnality, a consortium of financial institutions including Banco Santander, Barclays and UBS which works to develop blockchain payments, announced on the same day as the Bank of England’s release that it had applied to become an operator in the new system.
“It is exciting to see this development from the Bank of England supporting the opportunity to use tokenised cash assets on next generation payment systems, enabling on-chain wholesale exchange of value,” John Whelan, managing director of digital investment bank and innovation at Banco Santander, said in a statement.
Entities wishing to join the system will face an extensive list of requirements.
Hopeful applicants will have to maintain a 1-1 correspondence between the monies in the omnibus account and the participant balances on its platform, demonstrate a history of successful operation, be prudentially regulated by the bank, and have “robust legal arrangements” around risk and liability among other obligations.
Participants will also have to be regulated by HM Treasury as a systemically important payment system under the Banking Act 2009; prospective participants which are not currently classified as such will be able to be covered by this definition as soon as they launch.
“There will have to have been, alongside the omnibus application, parallel regulatory processes both in relation to the status of the operator and in relation to the status of the system that is operated by that operator,” Richard Hay, UK head of fintech at Linklaters, told VIXIO.
“It’s obviously got a specific set-up in mind that goes to ensuring that this type of account is used for certain kinds of payment system with a particular regulatory status.”
The rigour of these requirements was welcomed by experts, who saw it as an indicator of the Bank of England’s commitment to establishing the new system as a key aspect of the UK’s postKalifa Review emphasis on nurturing the development of innovative payment methods.
Marcus Hughes, director of business development at Bottomline Technologies, told VIXIO that the policy brought a “tremendous clarity which wasn’t there before, and I think this will become a blueprint for other central banks”.
From omnibus accounts to CBDCs
Laying down the laws for the new system in this way was seen as particularly crucial considering that it is widely seen as the point at which stablecoin and central bank digital currency (CBDC) products – most of which are still under development themselves – will enter the mainstream.
The policy was published by the Bank of England alongside the announcement that the UK will be debuting its own CBDC project, joining a number of other central banks around the world in the effort to develop a digital version of fiat currency.
“It’s almost a forerunner of how CBDCs will probably operate,” Hughes said of the omnibus account model.
“This is an exciting green light for payment systems operators to launch new systems using DL T for 24/7 instant payments, with retail and wholesale use cases.”
For now, however, the Bank of England is keeping a certain amount of distance between digital currency considerations and the omnibus account model.
Asked about the link between omnibus accounts and CBDCs, a spokesperson for the Bank of England told VIXIO that “it is true that this account model can enable innovative methods of wholesale settlement” but added that “the bank is not issuing any new asset or expanding the range of entities eligible to hold a claim on central bank money” and that there is “a separate programme of research” on CBDCs.
Senior Bank of England officials have also opined that there is unlikely to be any great demand for CBDCs in the near future.
But this reticence is not echoed by some of the originators of the plan.
Kay Swinburne, vice-chair of financial services at KPMG and co-author of the policy and regulation chapter of the Kalifa Report, said on a webinar on Wednesday (April 21), alongside Ron Kalifa, that the CBDC work being undertaken across HM Treasury and the Bank of England will be on an “aggressive timeline”.
With a general perception across the market that the omnibus account model will be the touchpaper for the launch of stablecoin offerings across the economy, the Bank of England will likely have to accept the link between the two sooner rather than later.
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