The Bank of England (BoE) has this week set out a quintet of ‘core principles’ that will form the backbone of its explorations into a potential central bank digital currency (CBDC).
The principles’ publication comes just weeks after the central bank announced that it is was setting up a CBDC unit, a ‘CBDC Engagement Forum’, ‘CBDC Technology Forum’ and would comprise half of a taskforce with HM Treasury (HMT) to ‘co-ordinate the exploration’ of a potential digital pound.
The five principles are: that financial inclusion should be a prominent consideration in a potential CBDC’s design; that a ‘competitive CBDC ecosystem’ offers the best chance to deliver a CBDC’s benefits; that in assessing the case for CBDC, the BoE should assess whether non-CBDC payment innovations could deliver the same benefits; that a CBDC should seek to protect users’ privacy; and that while CBDC should ‘do no harm’ to the BoE’s ability to ensure monetary and financial stability, opportunities to meet its policy objectives more effectively should also be considered in CBDC exploration.
The principles are contained in a summary of responses to the central bank’s ‘Central Bank Digital Currency: Opportunities, Challenges and Design’ discussion paper, published in March last year.
Respondents showed ‘strong agreement’ that the BoE should, at the very least, be carefully studying CBDC, even if there was a range of views on whether one was ultimately likely to be needed or desirable, the 25-page document notes. ‘There were some areas of significant agreement where a large majority expressed a similar view. The [BoE] therefore has identified five core principles from the responses that will guide its exploration of CBDC,’ the BoE explains.
Five principles explained
Setting out the principles, the BoE says that – in the context of financial inclusion – any CBDC must have a high degree of accessibility to people, regardless of their geographic location in the UK, age, socio-economic status, digital skills or disability.
In respect of a ‘competitive CBDC ecosystem’, the BoE says that respondents to its discussion paper agreed the BoE should provide the minimum level of infrastructure for the system to be reliable, resilient, fast and efficient, while the private sector should take a leading role in responding to the needs of the end-users.
In assessing the case for CBDC, it says an assessment of the net benefits should consider to what extent they can instead be delivered by private-sector proposals.
On the principle of users’ privacy, the BoE points out that there are important legal compliance arrangements that a digital pound would need to meet, for example related to anti-money laundering (AML). Privacy emerged as the single most important feature identified by respondents to a European Central Bank (ECB) consultation on a potential digital euro.
In respect of its fifth and final core principle, the central bank says that while it is primarily focused on possible benefits CBDC might bring for payments it is also considering the possible opportunities that CBDC may offer for monetary and financial stability.
‘Host of issues to address’
The BoE also this week published a discussion paper on ‘New Forms of Digital Money’, which it says aims to ‘broaden the debate’ and seek views on its ‘emerging’ thinking.
The paper considers issues including the role of money in the economy and also sets out an ‘illustrative scenario’ for the demand for new forms of digital money.
‘Commercial banks have never faced a large-scale, system-wide displacement of the deposits they create,’ the document points out. In the illustrative example, a fifth of all UK retail deposits transfer to new forms of digital money.
‘Uncertainty around demand for new forms of money is why the [BoE] is considering the need for limits to manage the transition period as they emerge,’ the central bank says, adding that it will do more work to decide if limits are necessary and how they would fit with other objectives.
Responses to the discussion paper are requested by 7 September and will support the work of the recently announced BoE-HMT taskforce, plus the BoE’s Engagement and Technology Forums.
“We live in an increasingly digitalised world where the way we make payments and use money is changing rapidly,” said the central bank’s governor, Andrew Bailey. “The prospect of stablecoins as a means of payment and the emerging propositions of CBDC have generated a host of issues that central banks, governments, and society as a whole, need to carefully consider and address. It is essential that we ask the difficult and pertinent questions when it comes to the future of these new forms of digital money.”
New principles, similar objectives
The newly announced BoE core principles represent an expansion on the three ‘foundational principles’ for CBDC already set out by leading central banks – including the BoE.
A 26-page report, ‘Central bank digital currencies: foundational principles and core features’ – which was published last October – highlighted a trio of ‘key principles’ for CBDC. Experts from the Bank for International Settlements (BIS) and ECB, as well as the Bank of Canada, Bank of Japan, US Federal Reserve, Sveriges Riksbank (Sweden) and Swiss National Bank also fed in to the report.
The BoE-HMT taskforce was announced by the UK chancellor, Rishi Sunak, on 19 April. It is being co-chaired by the central bank’s deputy governor for financial stability Sir Jon Cunliffe and HMT’s director-general of financial services, Katharine Braddick.
The taskforce is, according to the announcement, co-ordinating the exploration of the objectives, use cases, opportunities and risks of a potential CBDC; guiding evaluation of the design features a CBDC must display to achieve the UK authorities’ goals; supporting a ‘rigorous, coherent and comprehensive’ assessment of the overall case for a digital pound; and monitoring international CBDC developments.
*** Brazil’s central bank has published what it describes as ‘general guidelines’ for a potential CBDC. Banco Central do Brasil, which set up a CBDC working group last August, now wants to ‘deepen discussion on the subject, including opening up dialogue with the private sector’.
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Global Government Fintech organised an international webinar, in partnership with Amazon Web Services Institute (AWSI), entitled ‘Delivering Central Bank Digital Currencies (CBDCs): Exploring the Technology Challenge’ on 22 April.