The Bank of England plans to end its cosy relationship with major high street banks, clearing the way for social media organisations such as Facebook to offer digital currencies.
In a move that the governor, Mark Carney, said would usher in a new way to conduct financial transactions, the central bank will examine how to allow digital companies to access its payment system and even keep funds at the bank overnight.
In his last speech at the annual Mansion House dinner before leaving the Bank, Carney said Facebook’s proposal to create a digital currency – Libra - would face tough regulatory rules but would be considered alongside plans by rival financial firms to offer digital money.
Financial companies that want to streamline their transactions to lower costs, cutting out the high street banks, could also use the payment facilities at the central bank.
The governor, who steps down next January after almost seven years in the job, is known to want to set the central bank on a modernising path before he leaves.
In a controversial move, Carney met the Facebook founder and chief executive, Mark Zuckerberg, earlier this year, although the details of that meeting have not been released.
Carney said small- and medium-sized businesses were the main target of the reforms following a report that found they missed out on £22bn of funding. He said smaller businesses were either turned off applying for funds by overbearing bureaucracy or they were turned down by high street banks.
According to a report for the bank written by Huw van Steenis, an investment banker, many of the businesses missing out on vital funds for investment are services firms that have fresh ideas for expansion but lack the usual track record of borrowing. They also lack collateral in the form of property or plant and machinery.
Carney said the financial system was outdated and denying funds that startups and other smaller companies need to expand.
“The very nature of commerce is changing,” he said. “Last year one fifth of all sales in the UK were online. Next year it will be one quarter. Over the past decade the proportion of total payments made in cash has declined from two thirds to one quarter.”
Carney’s insistence that the financial system has to move with the times has received the backing of Philip Hammond. Speaking at the same event, the chancellor is expected to say that in order to “remain a dominant player we in the UK must do what London’s markets have always done: evolve. Refuse to stand still; reject the notion of the status quo; embrace change, disruption and challenge. Adopt, adapt and synergise enthusiastically and energetically. Radiate the energy and dynamism which distinguishes a real hub of innovation from its sterile imitators.”
The Bank has rejected setting up its own digital currency, preferring to regulate the offerings put forward by private sector operators.
