On 12 March 2020, the Bank of England (BoE) published a discussion paper on central bank digital currencies (CBDC) (the Discussion Paper). This does not impose formal rules for CBDC at this stage, but instead highlights key issues for further discussion and future challenges that CBDC could pose for payments, the BoE’s objectives for monetary and financial stability, as well as the wider economy.
While the Discussion Paper notes that a final decision has not yet been taken by the BoE on whether to introduce CBDC, if CBDC were to be introduced in the UK, the BoE emphasised that it would be denominated in pounds sterling. This means that £10 of CBDC would be worth the same as a £10 banknote. Most importantly, the BoE was keen to stress that any CBDC would be introduced alongside, instead of replacing, cash and commercial bank deposits.
Interestingly, the Discussion Paper highlights that CBDC could present a number of opportunities for the way the BoE achieves its objective of maintaining monetary and financial stability. In particular, the BoE noted that CBDC may facilitate safer payment services than new forms of privately-issued stablecoins, support a more resilient payments landscape and enable more efficient cross-border payments.
The BoE did acknowledge that the introduction of CBDC would create important policy challenges. For example, where significant deposit balances were moved from commercial banks into CBDC, this could have implications for the balance sheets of those banks and subsequently impact on the transmission mechanism for credit creation, thereby having a direct impact on the BoE’s exercise of monetary policy.
Technology will have a major impact on the extent to which CBDC meets its overall objectives. The BoE has said that it 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 then serve as the platform to which private sector Payment Interface Providers would connect in order to provide customer‑facing CBDC payment services. Although CBDC is often associated with distributed ledger technology (DLT) the BoE does not presume that any CBDC must be built using DLT.
The Discussion Paper follows developments in January this year where, in order to explore potential uses cases for CBDCs, the BoE created a group with five other central banks including the Bank of Canada, the Bank of Japan, the European Central Bank, the Sveriges Riksbank (Sweden) and the Swiss National Bank.
BoE invites feedback by 12 June 2020, from the public, technology providers, the payments industry, financial institutions, academics, and other central banks and public authorities.
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