Following the Bank of England’s (BoE) Discussion Paper in June 2021, HM Treasury (HMT) and the BoE have announced the next steps on the exploration of a UK Central Bank Digital Currency (CBDC). With over 86% of the world’s banks exploring digital currencies, CBDC could be the future for payment services in the UK, says Charlotte Gregory.
CBDC is a new form of currency, a virtual equivalent of a country’s fiat. It could be used by households and businesses as an alternative to physical cash or traditional bank deposits. With the rise of cryptocurrencies and cryptoassets, coupled with the move towards a cashless society, CBDC is a more “traditional” response to the likes of Bitcoin, Ethereum and stablecoins models.
For some, attraction to crypto is owed to flexibility and anonymity that can come with decentralised models. However, these traits can make it difficult to control or enable proper regulatory oversight.
CBDC on the other hand would be centrally issued by the BoE and subject to regulation. In this sense, some might think CBDC aims to be the best of both worlds – allowing speedy and efficient financial exchange, whilst bypassing some of the risks associated with the crypto, and its value will be less volatile (like a stablecoin).
In 2022, HMT and the BoE will launch a consultation setting out their assessment of the case 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.
Whether CBDC will be introduced in the UK is yet to be decided. However, the need from consumers for trustworthy, reliable payment services is evident. It’s also a timely announcement given the increasing popularity of stablecoins, which can operate in a variety of forms, some backed by real assets or simply pegged to a currency and others maintaining value via technical algorithms.
With a CBDC Taskforce set up in April 2021 alongside Engagement and Technology forums, the 2022 consultation will help to decide whether the authorities are content to move into a ‘development’ phase, which will span several years and potentially result in an introduction of a UK CBDC.