The Bank of England’s objectives are to maintain monetary and financial stability. Payment methods are changing, and the use of privately issued money and alternative payment methods rising. In this context, the Bank is exploring the concept of Central Bank Digital Currency (CBDC), as are central banks across the world, through a recently published a discussion paper.
According to the Bank’s discussion paper, a Central Bank Digital Currency would be an innovation in both the form of money provided to the public and the payments infrastructure on which payments can be made. Unlike banknotes, CBDC would be electronic, and unlike reserves, CBDC would be available to households and businesses. CBDC would therefore allow households and businesses to directly make payments and store value using an electronic form of central bank money. For this reason, CBDC is sometimes thought of as equivalent to a digital banknote, although in practice it may have other features depending on its final design.
If a CBDC were to be introduced in the UK, it would be denominated in pounds sterling, so £10 of CBDC would always be worth the same as a £10 banknote. Any CBDC would be introduced alongside, rather than replacing, cash and commercial bank deposits.
The Bank has not yet made a decision on whether to introduce CBDC, and intends to engage widely on the benefits, risks and practicalities of doing so, using the discussion paper as part of that process.
CBDC could provide a number of opportunities for the way that the Bank of England achieves its objectives of maintaining monetary and financial stability. It could support a more resilient payments landscape. It could help to meet future payments needs in a digital economy by enabling the private sector to create services that support greater choice for consumers. It could build on the Bank’s planned renewal of the Real-Time Gross Settlement service and complement private sector initiatives to improve payments.
CBDC may also provide safer payment services than new forms of privately issued money-like instruments, such as stablecoins (cryptocurrency tied to the price of national currency). Ensuring that the public has continued access to a risk-free form of money issued by the Bank may be especially important in the future, and help to address some of the consequences of a decline in the use of physical cash. Finally, a domestic CBDC might be an enabler of better cross-border payments in the future.
CBDC would also introduce important policy challenges and risks that need to be carefully considered and managed. If significant deposit balances are moved from commercial banks into CBDC, it could have implications for the balance sheets of commercial banks and the Bank of England, the amount of credit provided by banks to the wider economy, and how the Bank implements monetary policy and supports financial stability. Nonetheless, CBDC can be designed in ways that would help mitigate these risks.
The discussion paper outlines an illustrative ‘platform’ model of CBDC designed to enable households and businesses to make payments and store value. It is not a blueprint for CBDC, nor does it approach a decision to introduce one. Rather, it is intended to illustrate the key issues as a basis for further discussion and exploration of the opportunities and challenges that CBDC could pose for payments, the Bank’s objectives for monetary and financial stability, and the wider economy.
In the ‘platform’ model, the Bank of England would provide a fast, highly secure and resilient technology infrastructure, which would sit alongside the Bank’s RTGS service, and provide the minimum necessary functionality for CBDC payments. This could serve as the platform to which private sector Payment Interface Providers would connect to provide customer-facing CBDC payment services. Payment Interface Providers could also build ‘overlay services’. This is additional functionality that is not part of the Bank’s core infrastructure, but which might be provided as a value-added service for some or all of their users. As well as providing more advanced functionality, these services might meet future payment needs by enabling programmable money, smart contracts and micropayments. Payment Interface Providers would be subject to appropriate regulation and supervision in line with any risks they might pose.
Choices around technology would have a major impact on the extent to which CBDC meets the Bank’s overall objectives. Although CBDC is often associated with Distributed Ledger Technology, the Bank is not assuming that any CBDC must be built using DLT, and there is no inherent reason it could not be built using more conventional centralised technology. However, the Bank considers that DLT does include some potentially useful innovations, which may be helpful when considering the design of CBDC. For example, elements of decentralisation might enhance resilience and availability, and the use of smart contract technology may enable the development of programmable money.
However, adoption of these features would also come with challenges and trade-offs that must be carefully considered.
The discussion paper considers regulatory aspects such as the objectives of payments regulation, which should:
- Reflect the financial stability risk, rather than the legal form, of payment activities;
- Ensure end-to-end operational and financial resilience across payment chains that are critical for the smooth functioning of the economy; and
- Ensure that sufficient information is available to monitor payment activities so that emerging risks to financial stability can be identified and addressed appropriately.
The paper also considers issues such as money laundering and data protection.
The purpose of the discussion paper is to begin a dialogue on the appropriate design of CBDC and an evaluation of whether the benefits of CBDC outweigh the risks. The consultation ends on 12 June 2020.
