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The Bank of England (BoE) and Her Majesty’s Treasury (HMT) will be opening a consultation on the possibility of a UK central bank digital currency (CBDC) in 2022, the UK’s finance minister has confirmed, while outlining a possible timeline for the project.
The UK has taken a leap forward in its CBDC work, outlining the process that it could use to eventually issue a retail CBDC.
“Exploring the opportunities that a CBDC could offer is aligned with the government’s wider agenda to remain at the forefront of innovation and technology in financial services,” said John Glen, the UK’s economic secretary to the Treasury, in a parliamentary statement.
However, it will be a long time until UK consumers will be able to pay with a form of digital sterling, his statement noted.
“Exploring and delivering a UK CBDC, if there were a decision to proceed, would require carefully sequenced phases of work, which will span several years,” he said.
Part of this process includes HM Treasury and the Bank of England publishing a consultation next year, setting out their assessment of the case for a UK CBDC, including the merits of further work to develop an operational and technology model for a UK CBDC.
Following this, a decision would be taken on whether to move into a subsequent build and testing phase.
This phase would likely take several years and could involve the development of large-scale prototypes and live pilots, Glen added.
“Were the results of each of these phases to conclude that the case for CBDC were made, and that it were operationally and technologically robust, then the earliest date for launch of a UK CBDC would be in the second half of the decade,” he confirmed.
The newly announced timeline will be welcome in some quarters, as there had previously been concerns that the Bank of England was not moving fast enough on the matter.
It was in fact Ben Broadbent, a Bank of England (BoE) official, who originally coined the now-widely used term “CBDC” in a speech in 2016.
Since then, however, the central bank appears to have made little progress towards a CBDC, whereas other countries, such as Sweden and China, have moved more swiftly on the subject.
"The UK is taking a very considered approach, which means some central banks are further forward in comparison, with China already in the pilot phase and various central banks in Asia involved in the collaborative Project Dunbar,” said Alex Cravero, digital law lead at Herbert Smith Freehills.
However, this is not to say that the UK is not moving in the right direction, he continued. “You can't rush the analysis; acting without due consideration could have far-reaching, negative consequences."
Cravero, who has been involved in the development of the recently launched Digital Pound Foundation, also warned that it is still too early to say whether a UK CBDC will happen.
“It is an exploratory project and there are plenty of detriments alongside the benefits; for example, the involvement of commercial banks and potential monetary policy problems,” he said, pointing out the difficulties that the Bank of England and their counterparts have to navigate. "Ultimately, there are many reasons why a central bank may decide to not issue a CBDC."
However, others have taken the view that many central banks have been forced to respond with a CBDC after being caught unaware by market developments.
"The honest answer is that, for so many central banks, they were slow. Meanwhile, Diem, then Libra, woke them up,” said Alex Lheritier, debt and treasury advisory at Redbridge.
Yet he did agree that a cautious approach is necessary — even if this means falling behind.
"Where the French and British central banks are in full alignment is that there are benefits yet also risks to factor in,” he said, referring to the Banque de France, which has been carrying out testing with wholesale CBDCs.
By approaching the matter carefully, central banks will be able to answer concrete customer needs, while keeping associated risks under control, he said.
Whatever the wholesale or retail options being chosen by central banks, it should be kept in mind that the very day-to-day operations of banks would change, Lheritier added.
“As an illustration, at 5pm on a Friday, bankers close their books and get back on Monday to positions that are the same,” he said. “A CBDC would change this as they could be exchanged 24/7, and would mean that bank balance sheets would need to remain constantly open, which would require a thorough revamp of their operations."
While true, it is also worth pointing out that many central banks have also been looking to run their real-time gross settlements system 24/7 to support the growing liquidity needs of the increasing always-on economy. For example, towards the end of 2020, India's Reserve Bank announced it was going 24/7.
Work so far
The Bank of England and HMT have begun to build more momentum around CBDCs in 2021.
This has filtered through to the mainstream press as well, with news outlets beginning to jokingly refer to the UK’s CBDC as the "britcoin".
Work undertaken by the Bank of England’s has included publishing a discussion paper over the summer, aptly named "The Future of Money," which looked at the potential benefits and risks of CBDCs, as well as emerging forms of payment like stablecoins.
In September, the Bank of England established its CBDC engagement forum.
This included a variety of representatives from institutions old and new, such as Starling’s Anne Boden, Visa’s Charlotte Hogg, and digital and payments executives from SWIFT, MasterCard, and PayPal.
The Diem Association’s Christian Catalini is also part of the forum.
Catalini has played a significant role in the Diem Association’s charm offensive over the last year, stating that the association was “never meant to compete with the public sector” at an event in February.
