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The Bank of England (BoE) and HM Treasury have launched a joint consultation on a “digital pound”, a retail central bank digital currency (CBDC) that would serve as a new form of money for households and businesses.
Seeking feedback on their proposals by June 7, the BoE and Treasury have asked for guidance on a range of CBDC issues, including privacy, holding limits and private sector involvement.
In a foreword to the consultation, Chancellor Jeremy Hunt said the BoE and Treasury believe that the UK is “likely” to need a CBDC to ensure confidence and safety in the monetary system, and to remain competitive in the global economy.
“We are determined that the UK should remain at the forefront of innovation in money, payments and financial services,” he said.
“This is part of the government’s vision for a technologically advanced, sustainable, and open financial services sector that is globally competitive and acts in the interests of communities and citizens, creating jobs, supporting businesses and powering growth.”
The consultation provides a roadmap for the UK to further study the potential of a retail CBDC, but does not represent a commitment either to build one or to launch one.
However, if the UK were to launch a retail CBDC, Hunt said it would “sit alongside” cash rather than replace it.
“A digital pound would help to ensure that central bank money remains available and useful in an ever more digital economy, continuing to bolster UK monetary and financial stability while safeguarding the UK’s monetary sovereignty,” he said.
“It could provide a platform for private sector innovation, promoting further choice, competition, efficiency and innovation in payments.”
As a retail CBDC would be a major piece of national infrastructure, it would likely take several years to complete.
Both the BoE and Treasury believe it could be ready for launch by 2030, but according to the consultation, it would first undergo a three-phase development process.
Phase 1, which began in 2022, covers research and exploration; Phase 2, beginning in 2025, covers design and technical development; and Phase 3, beginning in 2025 at the earliest, covers prototypes and pilot tests.
Separately, the BoE has published a new Technology Working Paper that explores the potential options for the technical infrastructure of a retail CBDC, covering areas such as analytics, APIs, devices, interoperability and programmability.
According to the BoE, a “platform model” is currently the bank’s preferred model. In this model, the BoE would host the core CBDC ledger and an API layer.
The API layer would then allow private sector firms, such as payment interface providers (PIPs) and external service interface providers (ESIPs), to access the core ledger to provide user services.
Access to the core ledger would be subject to approval by the BoE, subject to PIPs and ESIPs meeting appropriate regulatory criteria.
Uniformity and trust
The BoE and Treasury see retail CBDC as a means to protect public central bank money against the “threat” of lower cash use and privately issued money.
Bank deposits, for example, carry counterparty risk, especially in times of financial distress, while more novel forms of private money, such as stablecoins, not only carry the same risks, but could also become more “deeply integrated” into payments and digital services in future.
“The emergence and take-up of these new forms of private digital money are uncertain, as is whether they are issued by existing financial institutions or new entrants, such as ‘Big Tech’ firms and startups,” the consultation notes.
“There is a risk that new forms of private digital money emerge in a fragmented way, such that they cannot always be easily converted into other types of money.”
Etay Katz, financial regulation partner at London-based law firm Ashurst, said there is merit to the BoE and Treasury’s arguments on the risks of privately-issued money.
"We see the introduction of sovereign digital money as an inevitability,” he told VIXIO. “This is partly to reflect technological advances and functionalities and partly as a defensive step to stave off systemic risk resulting from some crypto-asset activities.
“Whether this makes a small or large difference to day-to-day commerce and money intermediation will entirely depend on the model adopted. Any generalisation is unhelpful at this stage."
Tulip Siddiq, Labour MP and shadow city minister, shared Katz’s concern over further integration of crypto-assets into the UK financial system, in reference to the government’s plans to make the UK a “crypto hub” in future.
“It’s welcome that the BoE is exploring a state-backed digital currency,” she said. “But the Tories must stop promoting cryptocurrency gimmicks which have put people’s savings at risk. We need a serious strategy to attract FinTech companies to the UK.”
Digital pound specifications
The consultation stresses that the launch of a digital pound would be part of a public-private partnership, in which the private sector is responsible for interacting with end users.
For example, wallets to hold digital pounds would be offered by the private sector and could be accessed through smartphones or cards.
Similarly, neither the government or the BoE would be able to see any personal data associated with the CBDC digital wallets, but could see transaction data in an anonymised form.
“The digital pound would be at least as private as current forms of digital money, such as bank accounts,” the consultation notes.
“Our proposal for the digital pound envisages that PIPs would identify and verify users, but anonymise personal data before any sharing with the Bank.”
The digital pound would also come with personal holding limits. The consultation proposes that holdings per person be capped at between £10,000 and £20,000 — a range that would allow 75 to 95 percent of Brits to receive their salaries in CBDC.
However, respondents have also been asked to provide feedback on a £5,000 holding limit, which the consultation notes would help to curb outflows from bank deposits.
Although the digital pound will be programmable, the consultation proposes that private sector firms be entirely responsible for adding programmability to CBDC offerings, and that programmable features can only be added with users’ consent.
The consultation notes that some users may wish to limit their total spending, or limit their spending on certain items, such as gambling, by adding programmability to their CBDC holdings.
