A UK central bank digital currency (CBDC) is ‘likely to be needed in the future’, according to a long-awaited consultation paper released today.
HM Treasury and the Bank of England (BoE) have published the document, which has a four-month deadline for responses, to inform their approach to a potential digital pound – dubbed ‘Britcoin’ in a tweet by then-chancellor (now prime minister) Rishi Sunak in April 2021.
As expected, the authorities emphasise that no decision has yet been made to proceed with what has been described as a ‘major national infrastructure project’. But they share a conviction that the stepping up of preparatory work is justified.
The 116-page ‘The digital pound: a new form of money for households and businesses?’ paper analyses the public policy case for a CBDC in the UK, sets out elements of the authorities’ proposed design and reveals that a ‘design phase’ will run until 2025. A decision about whether to implement a digital pound is likely to be taken ‘around the middle of the decade’ and will ‘largely be based on future developments in money and payments’.
A ‘build phase’ – including live pilot tests – would begin in 2025 at the earliest. The earliest launch timing, should the lights turn from amber to green, is likely be the latter half of the 2025-2029 period.
CBDC consultation and technical paper
The high-level design for a potential UK CBDC set out in the consultation – which was originally scheduled to happen in 2022 – is, as expected, a public-private partnership.
The BoE would provide the central public infrastructure in the form of a ‘core ledger’ – a fast, resilient, secure technology platform – which would provide the minimum necessary functionality. Private sector providers would then use this infrastructure to design innovative, user-friendly services and handle customer-facing interactions.
The intention is to create a CBDC that is ‘inclusive and allows users to be in control of their data’ but, the authorities state, a digital pound could not be used anonymously ‘because the ability to identify and verify users is necessary to prevent financial crime’. Neither the government nor BoE would ‘program’ a digital pound or restrict how it was spent.
The authorities state that a limit on individuals’ holdings would apply ‘at least in the introductory phase’. This would, they say, ‘strike a balance between both encouraging use and managing risks, such as the potential for large and rapid outflows from banking deposits into digital pounds’. Such limits could be adjusted in the future.
The BoE has also today (7 February) published a technology working paper setting out ‘cutting-edge technology considerations informing the potential build of a digital pound’. This 86-page paper summarises a series of design principles relating to privacy, performance, security, resilience, extensibility and energy usage that will be applicable to the digital pound.
“As the world around us and the way we pay for things becomes more digitalised, the case for a digital pound in the future continues to grow,” BoE governor Andrew Bailey states in a press release. “A digital pound would provide a new way to pay, help businesses, maintain trust in money and better protect financial stability. However, there are a number of implications which our technical work will need to carefully consider. This consultation and the further work the Bank will now do will be the foundation for what would be a profound decision for the country on the way we use money.”
HMT and BoE’s engagement (to date)
UK authorities have already been engaging widely on the topic of CBDC. HMT and the BoE announced a CBDC taskforce to ‘co-ordinate the exploration’ of a potential digital pound in April 2021 and the line-ups for two discussion groups – the ‘CBDC Engagement Forum’ and ‘CBDC Technology Forum’ – in September 2021 (the former comprises 32 people focused on policy considerations and functional requirements and the latter, which comprises 26 members, has been considering issues including ledger design and data security).
HMT has recently been recruiting for the role of head of CBDC policy (part of a payments and fintech team that has grown to about 20 people) while the BoE, as well as undertaking its own CBDC recruitment, has been working with various external partners on CBDC assignments.
Global Government Fintech revealed last month that the central bank had engaged Guildford (Surrey)-based consultancy, Consult Hyperion, on two CBDC contracts each carrying a value of more than £100,000 (about $120,000). The BoE has also been working with management consultancy Oliver Wyman on CBDC (our box immediately below provides some further details).
Bank of England CBDC external contracts
*Consult Hyperion: £121,825 (point-of-sale proof-of-concept prototype; runs to 6 March 2023)
*Consult Hyperion: £113,650 (e-commerce/card-not-present transactions feasibility study; runs to 9 March 2023)
*MIT Media Lab DCI (USA): £75,000 (research; ran to 31 January 2023)
*Consult Hyperion: £48,900 (feasibility study; 7 February 2022-6 April 2022)
*Oliver Wyman: £32,000 (research; runs to 1 July 2023)
Source: Global Government Fintech research using UK government Contracts Finder website (boxout first published by Global Government Fintech on 10 January 2023)
In the final quarter of last year the BoE issued opportunities for a supplier to create a CBDC ‘sample wallet’ and also for a project exploring what was described as the ‘complicated’ possibilities and challenges of offline CBDC payments. These are separate assignments to those shown in the boxout above.
International comparisons – and UK Lords’ scepticism
Overall 68 per cent of central banks globally deemed themselves ‘likely to’ or ‘might possibly’ issue a retail CBDC in the short or medium term, according to a Bank for International Settlements paper published nine months ago (based on a survey of 81 central banks).
Nations including Nigeria (with its eNaira) and Jamaica (with Jam-Dex) are already live with CBDCs. China is continuing to motor ahead with its rollout of the digital yuan, while India has also begun digital rupee pilots.
The BoE is moving at a more similar pace to the European Central Bank (ECB), which is beyond the mid-point of a two-year ‘investigation phase’ into the possibility of a digital euro. The ECB’s Fabio Panetta recently dismissed the prospect of a potential eurozone CBDC being ‘programmable’ – having rules embedded within it that define or constrain its use, for example time limits or restrictions on what it could be used to buy – saying that ‘central banks issue money, not vouchers’.
In the UK, as in all nations, the possibility of CBDC has faced scepticism. A House of Lords economic affairs committee report, ‘Central bank digital currencies: a solution in search of a problem?’, published just over a year ago concluded that there was ‘no convincing case’ for a digital pound. The committee’s chairman said that no-one who provided oral evidence to the committee had provided a “compelling reason” why the UK needed a CBDC. The report’s downbeat title was also the title of a speech delivered in August 2021 by the US Federal Reserve System’s Chris Waller.
The Lords’ assessment did, however, provide some nuggets of cheer for those championing a potential Britcoin’s merits. For example, it stated that a wholesale CBDC (a CBDC for use between financial institutions) ‘may help to further enhance efficiency in securities trading and settlement’; and, more broadly, the committee stated that while there appear to be no significant advantages for the UK in being an early adopter, consumer payment preferences, technological developments and other countries’ decisions ‘may enhance the case for a UK CBDC in the future’.
UK also consulting on crypto
Separately, the UK government has just opened a consultation on plans to ‘robustly’ regulate a ‘broad suite of’ cryptoasset activities.
The three-month consultation includes proposals such as the bolstering of rules covering crypto trading platforms and the introduction of what is billed as a ‘world-first regime’ for crypto lending.
The 82-page ‘Future financial services regulatory regime for cryptoassets’ consultation will close on 30 April, after which the government work to set out its response. It follows earlier HMT proposals focused on stablecoins and crypto-asset promotions.
‘As is common in emerging technology markets, the crypto sector continues to experience high levels of volatility and a number of recent failures have exposed the structural vulnerability of some business models in the sector,’ the government states in its announcement of the crypto consultation. ‘Our robust approach to regulation mitigates the most significant risks, while harnessing the advantages of crypto technologies.’
Australia’s Treasury has also launched a crypto consultation. The ‘Token mapping’ consultation is bring run by the Financial System Division’s crypto policy unit. ‘Token mapping is the process of identifying the key activities and functions of products in the crypto ecosystem and mapping them against existing regulatory frameworks,’ the 59-page paper explains.
Global Government Fintech’s dedicated ‘Digital Currencies’ section
‘BoE engages external experts for CBDC projects’ – our scoop (10 January 2023) on the BoE advancing its research into the technical possibilities of a potential CBDC by engaging a consultancy, Consult Hyperion, on a pair of assignments
‘BoE wants digital wallet proof-of-concept to make CBDC “more tangible”’ – our news story (15 December 2022) on a ‘CBDC Sample Wallet Proof of Concept and Research’ opportunity being published on the UK government’s ‘Digital Marketplace’
‘Bank of England focuses on offline payments in CBDC proof-of-concept’ – our news story (21 October 2022) on the BoE looking to bring in external expertise for a project exploring what it described as the ‘complicated’ possibilities and challenges of offline CBDC payments
‘Digital pound’s potential benefits “overstated”, say UK Lords’ – our news story (24 January 2022) on the ‘Central bank digital currencies: a solution in search of a problem?’ report
‘Bank of England sets out five CBDC “core principles”’ – our news story (9 June 2021) on the BoE’s CBDC core principles
‘Prepare for ‘Britcoin’? Bank of England and HM Treasury launch CBDC taskforce’ – our news story (19 April 2021) on the BoE and HMT setting up a taskforce to co-ordinate their explorations (among other developments)