Bank of England issues discussion paper on a central bank digital currency

What is a central bank digital currency?

The Bank of England’s statutory objectives are to maintain monetary and financial stability. Payment methods are changing, with the use of banknotes falling, and the use of privately issued money and alternative payment methods rising. In this context, the Bank is exploring the concept of a Central Bank Digital Currency, along with other central banks across the world.

Unlike banknotes, CBDC would be electronic, and unlike reserves, CBDC would be available to households and businesses. CBDC would therefore allow households and businesses to directly make payments and store value using an electronic form of central bank money.

If a CBDC were to be introduced in the UK, it would be denominated in pounds sterling, so £10 of CBDC would always be worth the same as a £10 banknote. Any CBDC would be introduced alongside, rather than replacing, cash and commercial bank deposits.

Discussion paper and consultation

The Bank has not yet made a decision on whether to introduce CBDC, and intends to engage widely on the benefits, risks and practicalities of doing so. The discussion paper and accompanying consultation is part of that process.

Opportunities offered by a CBDC

CBDC could present a number of opportunities for the way that the Bank of England achieves its objectives of maintaining monetary and financial stability. It could support a more resilient payments landscape. It also has the potential to allow households and businesses to make fast, efficient and reliable payments, and to benefit from an innovative, competitive and inclusive payment system. It could help to meet future payment needs in a digital economy by enabling the private sector to create services that support greater choice for consumers. It could build on the RTGS service and complement private sector initiatives to improve payments.

Ensuring that the public has continued access to a risk-free form of money issued by the Bank may be especially important in the future, and help to address some of the consequences of a decline in the use of physical cash. Finally, a domestic CBDC might be an enabler of better cross-border payments in the future.

Policy challenges

CBDC would also introduce important policy challenges and risks that need to be carefully considered and managed. If significant deposit balances are moved from commercial banks into CBDC, it could have implications for the balance sheets of commercial banks and the Bank of England, the amount of credit provided by banks to the wider economy, and how the Bank implements monetary policy and supports financial stability. Nonetheless, CBDC can be designed in ways that would help mitigate these risks.

Platform model

The discussion paper outlines an illustrative “platform” model of CBDC illustrating the key issues as a basis for further discussion and exploration of the opportunities and challenges that CBDC could pose for payments, the Bank’s objectives for monetary and financial stability, and the wider economy.  The platform model would involve technology infrarsucture provided by the Bank of England.  It would permit “overlay services” to be added to it by payment interface providers, who

would be subject to appropriate regulation and supervision in line with any risks they might pose.  It may or may not use distributed ledger technology.

Adoption of these features would also come with challenges and trade-offs that must be carefully considered.

Key areas of focus and questions for consultees

The Bank’s ongoing work on CBDC will focus on the following areas:

• Impact on payments: understanding the benefits that CBDC could provide for payments users and for the economy more widely, taking into account that payments needs are changing as the economy becomes increasingly digital. This includes understanding how CBDC could complement or facilitate other initiatives to improve payments.

• Impact on monetary and financial stability: quantifying the benefits and implications of CBDC on monetary policy and financial stability, and identifying ways to mitigate any risks. This includes understanding the impact on the Bank’s own balance sheet and operations.

• Functionality and provision of CBDC: developing the design of CBDC to maximise benefits and minimise risks, and identifying the appropriate role of the public and private sector.

• Technology: understanding the technology that would be most appropriate to power a CBDC, including how the Bank could build a CBDC that enables significant further innovation in payments.

The consultation ends on 12 June 2020.