On 12 March 2020, the Bank of England ("BoE") published a discussion paper on central bank digital currency ("CBDC").
The discussion paper follows a joint announcement on 21 January 2020 by the BoE, the Bank of Canada, the Bank of Japan, the European Central Bank, the Riksbank (the Swedish Central Bank), the Swiss National Bank and the Bank for International Settlements ("BIS") that they have created a group to share their experiences of assessing the potential cases for CBDC.
What is CBDC?
CBDC is an electronic form of central bank money that can be used by households and businesses to make payments and store value.
Currently, the public can hold BoE-backed banknotes, but only banks and certain other financial institutions (such as building societies, PRA-supervised broker-dealers and central counterparties) can hold electronic central bank money in the form of central bank reserves. CBDC would be an electronic form of money backed by a central bank which could be used by households and businesses to make electronic payments in central bank money.
Unlike privately-issued cryptocurrencies (such as Bitcoin or Ethereum) and stablecoins (cryptoassets whose value is linked to another asset), CBDC is a form of central bank money issued and backed by a central bank. Distributed ledger technology ("DLT") can, but does not have to, facilitate CBDC.
CBDC would provide both a new form of central bank money and a new infrastructure on which payments could be made.
The Bank of England's approach to CBDC
In a world where the use of banknotes is falling, and the use of privately-issued money and alternative payment methods is rising, CBDC offers the BoE opportunities to achieve its objectives of maintaining monetary and financial stability.
CBDC could ensure that the public has continued access to a risk‑free form of money issued by the central bank and avoid the risks of new forms or private money creation, support a resilient and efficient payments landscape and meet the needs of a digital economy. However, CBDC could also "raise significant challenges for maintaining monetary and financial stability," as cautioned by the BoE. For example, if a significant amount of deposit balances is moved from commercial banks into CBDC, it could have implications for the balance sheets of commercial banks and the BoE, as well the amount of credit provided to businesses and individuals.
In Chapter 4 of its discussion paper, the BoE presents an illustrative model of CBDC that draws on its earlier research. In this model, CBDC would serve as a platform with a core ledger provided by the BoE and private sector "payment interface providers" who would handle the interaction with CBDC end-users and provide additional functionality and innovation. The CBDC system as a whole would be designed to be compliant with anti-money laundering and data protection regulations.
The BoE said in its discussion paper that if it did introduce CBDC in the UK, it would be denominated in pounds sterling, in the same way as banknotes. Therefore, £10 of CBDC would also be of the same value as a £10 note. Any CBDC would also be introduced alongside cash and bank deposits, instead of replacing them.
In its annual survey conducted in 2019, BIS demonstrated that central banks are undertaking extensive work on CBDC. Of the 66 central banks that replied to the 2019 BIS survey, 80% of central banks are engaging in some sort of work on CBDC and 40% have progressed to experiments and developing proofs of concept.
For example, the Hong Kong Monetary Authority and the Bank of Thailand collaborated on a joint Project Inthanon-LionRock to study the application of CBDC to cross-border payments in Hong Kong dollars and Thai baht. The project involved a DLT-based proof-of-concept prototype with ten participating banks from both jurisdictions. In January 2020, both authorities published a report summarising their findings from Project Inthanon-LionRock. Both authorities agreed to proceed with further joint research, including exploring business cases and connections to other platforms, involving participation of other banks and other relevant parties in cross-border funds transfer trials.
In Singapore, the Monetary Authority of Singapore launched a multi-year, multi-phase project called Project Ubin with the industry to explore the use of blockchain and DLT for the clearing and settlement of payments and securities. As of March 2020, the project is in its fifth phase and the authority has since published five project reports.
In Sweden, the Riksbank started a project in the spring of 2017 to examine the possibility of issuing e-krona, its own CBDC. An e-krona would give the general public access to a digital complement to cash, where the state would guarantee the value of the money. The Riksbank is currently developing a proposal for testing a technical solution for e-kronor based on DLT. The pilot will run until February 2021. The Riksbank has not made a decision on issuing an e-krona, how an e-krona might be designed or what technology might be used. The main purpose of the pilot is for the Riksbank to increase its knowledge of a central bank digital krona.
The BoE has not yet arrived at a decision on whether to introduce CBDC in the UK. Its discussion paper is intended to start a dialogue and be a basis for further research.
The publication of the discussion paper is a natural development in an environment where an increasing number of central banks are exploring and experimenting with CBDC. An introduction of CBDC poses numerous opportunities for central banks, but also threats, and the discussion paper allows interested parties to submit their views.
The BoE invites feedback and ideas from financial institutions, businesses, academics and the wider public by 12 June 2020. It will also be hosting a webinar on 7 April 2020 on the discussion paper.