The Bank of England and HM Treasury are in the design phase for the creation of a digital pound or central bank digital currency. A consultation paper outlined the framework as a precursor to a possible digital currency.
The update by the Bank is said to summarise progress on a digital pound over the past year.
The Bank states:
“Providing banknotes as a universally accessible form of retail central bank money – a financially risk-free asset – has been a core responsibility of the Bank for much of its existence. A digital pound could extend access to retail central bank money by supporting and complementing the system of cash and privately issued money – primarily commercial bank deposits and new forms of private digital money in the future.
Through its technical and scheme standards, a digital pound could help deliver a safe, reliable and accessible digital infrastructure for participants. It could also provide a means for private digital payment providers to ensure interoperability with central bank money. Together these would benefit the overall payments ecosystem.”
The design phase is outlined as follows:
- Experiments and proofs of concept: focused experiments collaborating with innovative private sector firms. These will establish the technological feasibility of different design choices.
- Blueprint: a proposed model and design of a potential digital pound that will form the basis for the assessment.
- National conversation: a program of engagement by the Bank and HM Treasury to ensure that work on a digital pound takes account of stakeholder views.
- Assessment: a framework to evaluate the costs and benefits of a digital pound, to inform the decision on whether or not to proceed to the build phase.
The Bank said it would start sharing its thoughts on a digital pound, encouraging discussions with stakeholders.
Quant founder and CEO Gilbert Verdian believes that digital currency will play a key role in supporting the UK as a global financial center. In a note to CI, Verdian said the update by the Bank revealed the Bank’s “determination to lead by example” while putting pressure on the commercial banking sector.
“The BoE has repeatedly stated that it is agnostic on the potential introduction of a CBDC, but that it is committed to providing the regulation and infrastructure needed for private institutions to innovate “safely and sustainably” when it comes to digital money. The update highlights critical areas, including the need to offer programmable payments to consumers and to empower new entrant firms to deliver innovative payment services without requiring them to have the means to issue money,” said Verdian.
He added that programmable money will play a pivotal role in “tomorrow’s financial system.”
“Programmability is central to the evolution of digital finance, bringing new functions across payments and settlement that are inconceivable under the current system. Initiatives like the Regulated Liability Network (RLN) demonstrate the private sector’s readiness to invest in this future, provided there is strong regulatory support. The ongoing work on this will be key to defending the UK’s status as a leading financial innovator.”
An essential aspect of CBDC regards privacy concerns and abuse of information. Opponents of CBDCs argue that while central governments may promise not to snoop on users of a digital currency issued by the government, the lure may be too hard not to abuse. Some insiders believe privately issued “stablecoins” are a better path to keeping the government’s involvement as a regulator and not so much an issuer of a digital currency.