Bank of England jumps on the central bank digital currency bandwagon

As several central banks race to figure out their own Central Bank Digital Currency (CBDC) strategies, which will see them developing digital equivalents of their current sovereign cash systems, Britain is thinking of entering its own horse. British finance minister Rishi Sunak has instructed the Bank of England (BoE) to look at the case for a new “Britcoin” to tackle the challenges posed by cryptocurrencies such as Bitcoin.

In a nutshell, a BoE backed digital version of sterling would potentially allow businesses and consumers to hold accounts directly with the bank and to sidestep others when making digital payments, upending the lenders’ role in the financial system. Sunak also announced a top-level task force to explore the benefits and risks of the idea.

Reports indicated that the chancellor spoke at a financial industry conference, stating that the task force will be jointly led by the Bank’s deputy governor for financial stability Jon Cunliffe, and the Treasury’s director general of financial services Katharine Braddick will “coordinate exploratory work”. For Sunak, he wants the UK to be at the forefront of innovation and to take advantage of regulatory freedoms after Brexit.

“If a CBDC were to be introduced, it would be denominated in pounds sterling, just like banknotes, so £10 of CBDC would always be worth the same as a £10 note. CBDC is sometimes thought of as equivalent to a digital banknote, although in some respects it may have as much in common with a bank deposit. Any CBDC would be introduced alongside – rather than replacing – cash and bank deposits,” the bank said.

The Treasury then said two new forums would be established to engage technical experts and key stakeholders including financial institutions, retailers, businesses, civil society groups, and consumers. The move is said to be timely given the decline in the use of cash and the increased prominence of cryptocurrencies such as Bitcoin. Thus, there has been heightened interest among policymakers about the viability of CBDCs.

Among the focus of the task force are how the BoE would get the new currency into the economy, how households and businesses would use it, and the implications for financial stability. In a sign that an official digital currency for the UK remains some way off, the Bank said its work with the Treasury would coordinate exploration of the objectives, opportunities, and risks of a potential UK CBDC. The bank would also guide the evaluation of the design features a CBDC must display to achieve its intended goals.

BoE is also expected to support a rigorous, coherent, and comprehensive assessment of the overall case for a UK CBDC and monitor international CBDC developments to ensure the UK remains at the forefront of global innovation.

To Sunak, his proposals would enhance the UK’s competitive advantage in fintech – the use of technology designed to make the delivery of financial services products more efficient. These would, according to reports, include helping firms to “scale up” and the use of a “sandbox” – a testing environment – to explore financial products that would help to reduce greenhouse gas emissions.

“Our vision is for a more open, greener, and more technologically advanced financial services sector. The UK is already known for being at the forefront of innovation, but we need to go further. The steps I’ve outlined today, to boost growing fintech, push the boundaries of digital finance, and make our financial markets more efficient, will propel us forward. And if we can capture the extraordinary potential of technology, we’ll cement the UK’s position as the world’s pre-eminent financial center,” he added.

A separate report by the BoE said “digital currencies do not currently pose a material risk to monetary or financial stability in the United Kingdom. Should they achieve limited adoption as a payment system, they are unlikely to undermine the Bank’s ability to achieve monetary stability. While that could, in theory, change if sterling were abandoned in favor of an alternative currency for a significant fraction of the economy, such a scenario is considered extremely unlikely at present.”

It added that a variety of potential risks to financial stability could emerge if a digital currency attained systemic status as a payment system, most of which could be addressed through regulatory supervision of relevant parties. Currently, China is a front-runner in this CBDC league. The other week the European Central Bank said it was studying an electronic form of cash to complement banknotes and coins but any launch was still several years away. Even the US policymakers have talked of a possible digital dollar.