WIREDGOV

In 2022, HM Treasury (HMT) and the Bank of England (BoE) will launch a consultation which will set out their assessment of the case for a UK Central Bank Digital Currency (CBDC). techUK is hosting an event on digital currencies on 2nd December.

From the fintech review to a consultation on CBDC

Following the publication of the Kalifa Review of UK Fintech, by HM Treasury, the Bank of England set out a taskforce and a forum to coordinate the exploration of a potential UK CBDC. As part of a ‘research and exploration’ phase and to help inform policy development over the next few years, HMT and the BoE have now announced they will publish a consultation next year.

The consultation will assess the merits of further work to develop an operational and technology model for a UK CBDC. It will evaluate the main issues at hand, consider the high-level design features, possible benefits and implications for users and businesses, and considerations for further work.

This critical work will inform a decision on whether the authorities should move into a ‘development’ phase which will span several years. A technical specification would follow the consultation explaining the proposed conceptual architecture for any CBDC.

No decision has been made yet on a UK CBDC and the earliest date for launch of a UK CBDC would be in the second half of the decade.

A refresher on CBDCs

CBDCs are expected to be denominated in national currencies and hence will be similar to fiat currencies in digital form but may use a distributed ledger technology solution as the underlying technology.

CBDCs issued by central banks are expected to be pegged to national fiat currencies and are expected to be convertible at par. Many central banks have experimented with issuing fiat currencies to banks through distributed ledger technology to enable real time peer-to-peer transfer between the banks and/or between the customers.

To date CBDCs are being considered in broadly the following two forms:

Wholesale CBDC:

Central bank issue funds into the DLT based interbank ledger for the purposes of inter-bank payments. Customers’ accounts would continue to be maintained in the respective core banking accounts of their banks. An Interbank ledger is used for moving the funds across the banks as per customers’ funds transfer instructions.

In this approach, interbank ledger replaces the traditional centralised payment infrastructure. Intra-bank movements and customer balance updates will continue to be maintained in their existing core banking systems.

Retail CBDC:

Retail and business customers will be able to directly access the distributed ledger. Hence, customers will have a choice to hold their balances in a bank account or maintain it in a CBDC distributed ledger.

These developments are promising, and we are looking forward to working with our members on the future of digital currencies including CBDC, stable coins and crypto-assets. Find out more about digital currencies by reading our white paper on digital currencies: Future of Digital Currencies.