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UK Central Bank Digital Currency: an overview

Posted on 17 June 2022

The Bank of England continues to adapt to the innovations and needs of society. From paper money (bank notes) to electronic payments, the Bank has been trying to keep pace with a fast changing world and the digitalisation of the economy.

The private sector is increasingly turning to blockchain technology to create new digital currencies (such as Bitcoin or Ethereum) and decentralised payment platforms which facilitate daily transactions using these currencies. This increase in innovation has, inevitably, led to a rise in concern as to the impact of these new technologies on the stability of the financial markets and consumer protection. This is illustrated by attempts by HM Treasury and the Financial Conduct Authority (FCA) to create a safe, regulated environment around the use of cryptocurrencies.

The Bank of England's ambition is to control its own private blockchain and create a centralised digital currency: the UK Central Bank Digital Currency (CBDC) or "Britcoin".

In March 2020, the Bank of England published the "Central Bank Digital Currency Opportunities, Challenges and Design" discussion paper (the 'March 2020 Discussion Paper'), where it gave an overview of the proposed CBDC. Its stated key objectives are  to innovate in both the form of money provided to the public and the payment infrastructures on which payments can be made, all while maintaining monetary and financial stability.

In the March 2020 Discussion Paper, the Bank of England explained that CBDC would be backed up by financial assets denominated in Sterling, which will be held by the Bank of England, to ensure stability – this is the same principle as other stablecoins that currently exist, such as Tether. In theory, holding £10 CBDC would be the same as holding a £10 banknote. The Bank of England aims to introduce its digital currency alongside existing fiat currency and banking infrastructure. In respect of CBDC, customers will be able to store coins in their digital wallets, without the need to have credit cards or use their bank accounts to send money or make payments.

The main benefits of implementing CBDC would be to:

  • Increase the speed of transactions by using blockchain technology to remove the intermediate steps (and intermediaries) required by the existing online payments infrastructure, thereby reducing the costs of executing payment transactions, for the benefit of the retail payments sector;
  • Ensure the existence of a safe and compliant framework, as CBDC aims to be a safer alternative to cryptocurrencies. The stability offered by CBDC is intended to encourage people to adopt it and be confident using it. The fact that it will be controlled and centralised in the hands of the Bank of England should also add a layer of safety for customers in comparison to the anti-money laundering and counter-terrorist financing issues frequently encountered by other cryptocurrency platforms; and
  • Provide liquidity. Bank-related services such as cash withdrawals, bank transfers or bank deposits require ATMs and banks to be available, which causes issues on weekends or bank holidays. The users of digital money such as CBDC would not face these difficulties. It also lowers the risks associated with robberies or ATM hacking.

In June 2021, the Bank of England, together with the Financial Policy Committee (FPC) issued a Discussion Paper on New Forms of Digital Money (the 'June 2021 Discussion Paper'). This paper built on the Bank's March 2020 Discussion Paper and June 2021 Responses to the March 2020 Discussion Paper (the 'June 2021 Responses') and addressed the following topics: the role of money in the economy, the Bank's public policy objectives, the implication of digital money for macroeconomic stability and the regulatory environment. In March 2022, the Bank issued the responses to the June 2021 Discussion Paper (together with the June 2021 Responses, the 'Responses') which summarised the responses it had received to the June 2021 Discussion Paper and planned next steps. In particular, this focussed on the "regulatory model for systemic stablecoins" in the context of CBDC.

The Responses addressed the following risks/criticisms:

  • Challenge to financial inclusion: CBDC should be available to all users, regardless of their geographic location within the UK, their socioeconomic status, digital skills or disability. The digitalisation of payment services and money emphasised by the COVID-19 pandemic has made it more difficult for some people to access some public and private services/resources with, for example, some shops refusing cash payments or some bank services only available via bank apps. Users without access to digital wallets or to relevant devices, or without any relevant education on digital money, would not be able to access CBDC and could be isolated from a more digitalised society. The need for a "public education on digital money" was strongly recommended by the respondents to the Discussion Papers.
  • Impact on commercial banks: if customers move significant amounts of fiat currency currently deposited with banks into CBDC, it could have wider implications for the balance sheets of these commercial banks. In turn, this would affect the amount of credit provided by banks to the wider economy, especially those provided to "small and medium-sized" enterprises, and how the Bank of England implements monetary policy to ensure financial stability.
  • Time well spent? There are doubts as to whether CBDC is truly innovative. The responses provided to the March 2020 Discussion Paper suggest that the "intended benefits could be achieved through other forms of payments innovation" and raises the question as to whether focus would be better placed on improving existing payment platforms and regulating digital money-related platforms, instead of investing time and money into a completely new project.
  • Rejection of centralisation: by centralising all money movements, the Bank of England is aiming to eradicate a popular aspect of blockchain technology which aims to decentralise activities. The assumed popularity of CBDC amongst crypto-users has been widely challenged, facing hostility from those who found in 'crypto' a way to avoid using controlled infrastructures.

The Bank of England seems willing to mitigate and further address these criticisms and risks in its current and future initiatives. Indeed, the Bank has initiated a joint taskforce with HM Treasury, to ensure "a strategic and coordinated approach to CBDC exploration by UK authorities" and make sure the project stays in line with the objectives. The Bank has put in place a CBDC Engagement Forum which aims to engage with "senior stakeholders" from the finance industry, academia and civil society, on the "practical challenges of designing, implementing and operating a CBDC". It is also introducing a CBDC Technology Forum aimed at researching and discussing the technology behind the implementation and use of CBDC. The forum's members include individuals from financial institutions, universities, FinTechs and tech firms.

The Bank of England is also working closely with the HM Treasury and other authorities, to counter risks associated with data protection issues and "identify ways to better inform end-users in relation to the new services and risks associated with them".

Next steps

In November 2021, the Bank of England and HM Treasury announced that they will publish a consultation paper in 2022 to discuss further the role that CBDC might play in the UK. The Bank explained that this consultation paper would look at the "merits for developing an operational technology model for CBDC". In the meantime, the Bank has indicated it will seek to engage with businesses and communities to ensure CBDC is relevant to potential users and will have a positive impact on society.

Article co-written by Imane Karoum, Paralegal, Corporate

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