The Bank of England has taken its first major step into the digital currency era. It launched a pilot programme for a wholesale central bank digital currency (CBDC). The move targets settlement systems used by financial institutions.

Governor Andrew Bailey made the announcement at the annual Mansion House speech. He framed it as a modernisation of the UK’s financial plumbing. “We are not just tinkering,” he said. “This is about ensuring the pound remains fit for the 21st century.”

Unlike a retail digital pound, which would be used by the public, the wholesale version is designed for banks and large financial firms. It settles high-value transactions between them. The current system, Real-Time Gross Settlement (RTGS), processes over £775 billion daily. But it is decades old. Critics call it slow and costly.

The pilot will run for six months. It will involve a handful of commercial banks, including Barclays and HSBC. They will test transactions using a distributed ledger, similar to blockchain. The goal is to see if it can reduce settlement times and lower costs.

“The current system works, but it is not efficient,” said a senior Bank of England official who spoke on condition of anonymity. “We are exploring whether tokenised money can make it faster and more resilient.”

But the news has sparked controversy. Privacy campaigners worry about state surveillance. The Bank insists wholesale CBDC will not be available to the public. “This is not about tracking every coffee purchase,” Bailey said. “It is about the machinery of finance.”

Critics also point to risks. The technology is untested at scale. A glitch could destabilise markets. The Bank acknowledges these concerns. It has set up a technical advisory group with experts from academia and fintech.

The Treasury supports the pilot. Chancellor Rishi Sunak called it “a bold step”. He wants London to retain its edge as a global financial centre. Other countries are moving fast. China’s digital yuan is already in use. The European Central Bank is developing a digital euro. The US Federal Reserve is researching a digital dollar.

“If we don’t innovate, we fall behind,” said Sir John Gieve, a former deputy governor of the Bank of England. “But we must move carefully. Trust is everything in money.”

The pilot will also explore smart contracts. These are self-executing contracts with terms written into code. They could automate payments and reduce the need for middlemen. That worries some in the finance industry. “It could disrupt jobs,” warned a City of London banker. “But it could also create new ones.”

The Bank has not committed to a full rollout. Bailey urged calm: “This is a pilot, not a revolution. We will report back to Parliament before any decision on a live system.”

Still, the message is clear. The UK is edging towards a digital pound. The question is no longer if, but when. And how far it will go.