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Bank of England to consult on 'Central Bank Digital Currency' launch, as CBDC experiments globally surge

Coming, later this decade? (Others are experimenting more aggressively)

The Bank of England (BoE) and HM Treasury (HMT) have vowed to take a closer look at whether they should launch a UK Central Bank Digital Currency (CBDC) -- and will begin a full-fledged consultation looking at the merits of developing an "operational and technology model" in 2022. If the two pull the trigger on creating such a currency, the earliest it would go live is in "the second half of the decade" they cautioned.

The November 9 announcement comes after the BoE and HMT set up a join taskforce to explore the idea of creating a Central Bank Digital Currency in April 2021 and as interest surges in the idea. A 2021 BIS survey of central banks found that 86% are actively researching the potential for a CBDC, 60% were experimenting with the technology, and 14% of central banks are already deploying pilot projects, the BIS found.

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Various approaches to a Central Bank Digital Currency are being trialled. But essentially the idea is that unlike the "digital cash" issued by commercial banks, each CBDC unit of cash will have a unique, unchanging digital identity and be a direct liability of the central bank. (Today’s digital currencies are underpinned by their convertibility into "paper" -- something in turn dependent on the bank issuing it having enough paper money on hand to use for the conversion. A CBDC strips out that reliance on this core part of the banking system. It's hard to think of something more fundamentally disruptive to how contemporary financial systems work...)

Technology approaches vary, but distributed ledgers are central to the idea. An early prototype being deployed by the People’s Bank of China (PBOC) is storing records on both a central and blockchain database.

See also: Dr Louise Beaumont: Financial services has long been a “fat complacent oligopoly with zero innovation”

Other ongoing experiments globally include "Project Dunbar", which brings together the central banks of Australia, Malaysia, Singapore, South Africa and the BIS Innovation Hub. The five are exploring the use of a central bank digital currencies (CBDCs) for international settlements. The big idea: a multi-CBDC shared platform for international settlements to streamline cross-border payments and make payments "faster, cheaper and safer" while stripping out the need for established intermediaries such as correspondent banks.

The five are trialling technology from R3 (Corda) and Partior (a creatiun of JPMorgan, Temasek, Singapore’s state-owned investment firm, and DBS, Singapore’s state bank) for Project Dunbar. As BIS says enthusiastically of that project: "Distributed ledger technologies' decentralisation capabilities and the programmable nature of smart contracts and CBDCs, tied together in a sophisticated platform design, have produced an elegant solution for central banks to share a common settlement infrastructure for cross-border payments."

DBS Bank, JPMorgan and Temasek meanwhile have developed a live production grade network for the Monetary Authority of Singapore, transacting on commercial bank money, built on the learnings from the authority's early Project Ubin, with further pilot trials taking place this year.

(See also: Multi-CBDCs: Designing a digital currency stack for governability)

The Bank of England appears to be some way from involvement in this kind of effort.

As the Treasury and BoE said November 9: "The 2022 consultation will inform a decision on whether the authorities are content to 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. This could involve in-depth testing of the optimal design for, and feasibility of, a UK CBDC. If the results of this ‘development’ phase conclude that the case for CBDC is made, and that it is operationally and technologically robust, then the earliest date for launch of a UK CBDC would be in the second half of the decade" the two said in a joint release.