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A UK payment initiative to facilitate collaboration between the private and public sectors has launched with the intention to usher in a new era of digital payments using a central bank digital currency (CBDC).
Project New Era, launched by The Payments Association, paywith.glass and other private industry stakeholders, advocates for a greater collaboration between central banks, regulators, commercial banks and other financial institutions towards the exploration of a retail CBDC they call "dSterling".
The green paper, published on February 9, lays the ground for real-world pilots that facilitate the work of public authorities to address open design questions and mitigate the risks of a potential CBDC.
“Much has been written about the challenges posed by a retail CBDC, including the macroeconomic risks like bank disintermediation and the role of commercial banks and other FIs in the new ecosystem,” said Kunal Jhanji, managing director at the Boston Consulting Group (BCG), which is taking part in the initiative as a consulting partner.
“These challenges require the public and private sectors to come together and create an inclusive framework for new infrastructure, legislation and policy that resolves open questions and responsibly unlocks the transformative benefits of digital money for the UK.”
There are around 90 central banks in the world exploring the development of a CBDC.
Although Western societies such as the US and the EU have not taken a decision yet as to whether they will issue a digital fiat, large economies such as China are already piloting their digital yuan, with India and Mexico being the latest countries to formally announce plans to issue a CBDC in the coming years.
Meanwhile, in the UK, the appetite for a dSterling seems to diverge among regulators and legislators.
Late last year, the treasury minister announced that the Bank of England and HM Treasury will be opening a consultation on the possibility of a UK CBDC in 2022.
However, in mid-January, the Lords Economic Affairs Committee said it did not hear a compelling reason for why the UK needed a CBDC, and the potential benefits of a digital pound could be achieved through less risky alternatives.
To help facilitate the exploration of a digital fiat, the newly-created Digital FMI (financial market infrastructure) Consortium plans to carry out real-world pilots that will generate working data and feedback that central banks and policymakers can use to inform open design questions and enable them to make policy decisions.
The pilots will include dSterling, a “pre-CBDC” asset issued by the consortium, and will test several use cases that could be relevant in the exploration of a UK dSterling.
These include improving the efficiency of retail payments, potentially reducing transaction costs for merchants, and using programmability to enable innovative use cases like conditional payments and near-instant pay-per-use micropayments.
It will test scenarios to enhance cross-border transactions with the aim of enabling near-instant settlement, reduced transaction costs and increased payment traceability. It also plans to explore interoperability requirements to future-proof the Digital FMI.
In addition, the pilot will look into tokenisation-as-a-service to provide an infrastructure for future use cases that enable private organisations to tokenise and transact assets for use in closed ecosystems with customers or suppliers.
Finally, the pilot aims to support the potential use of dSterling by payment institutions and e-money issuers as secure, liquid assets. The asset will also enable access to an alternative payment rail to address challenges around non-bank access to banking.
Speaking on the launch of the green paper, Tony Craddock, director general of The Payments Association, said: “The widespread adoption of CBDCs could be as important to the 21st century as the end of the gold standard was to the 20th.
“Because of the UK’s long-standing position at the forefront of global financial services we have an opportunity to take a leading role in the next generation of financial services. Our next step will be to build a larger stakeholder network from the public and private sector that will be key in building the pilot project.”
