Central bank digital currency (CBDC) experiments are flourishing across the world, with the Bank for International Settlements estimating that 90% of central banks are currently researching CBDCs, running multiple concepts or starting pilots. The Bahamas, Cambodia and Nigeria have already launched full implementations of CBDCs. Despite these developments, progress is slow in other markets, which has left many in the private sector impatient for tangible results.
In the UK, the Bank of England’s (BoE) latest initiative is a consultation, to be launched in association with HM Treasury (HMT) early in 2022, to ascertain whether the public sector should advance to a development phase of a retail CBDC, effectively a digital form of cash issued by the BoE for use by households and businesses for their everyday payments needs. If the answer is yes, then the earliest date for launch of a UK CBDC would be in the second half of the decade, according to a joint statement by BoE and HMT.
Not satisfied with sitting on the sidelines of digital currency innovation, a private sector initiative called Project New Era recently launched a green paper, ‘A New Era for Money’, calling for greater collaboration between central banks, regulators, commercial banks and other financial institutions on a UK CBDC.
Led by The Payments Association (members include Lloyds Banking Group, Barclays, NatWest and Banking Circle), paywith.glass and other private industry stakeholders, and supported by Boston Consulting Group (BCG), Project New Era plans to form a private consortium, called the Digital FMI Consortium, which will conduct a real-world pilot with a ‘digital pound’ (dSterling). Defined as a pre-CBDC, the dSterling will be privately issued and is fully collateralised through commercial bank reserve account.
The pilot will focus on core design issues, including the role of commercial bank liability in a CBDC environment, bank disintermediation, liquidity crunches in crises, currency substitution and other risks. Speaking at the launch of the green paper in London, Kunal Jhanji, managing director and partner at BCG, said that the consortium will also consider “fundamental” design questions around cybersecurity, data privacy and resilience.
The pilot will look to validate four initial use cases that are expected to deliver benefits for the UK market:
- Retail payments: enabling domestic payments to address card and account transfer inefficiencies, along with programmable payments;
- Cross-border transactions: exploring collaboration with global CBDC projects to inform interoperability requirements and unlock benefits, such as lower transaction costs and near instant settlement;
- Tokenisation-as-a-Service: enabling future private organisations to tokenise and transaction assets for use in closed ecosystems with customer or suppliers;
- Servicing payment institutions (PIs) and electronic money institutions (EMIs): enabling PIs and EMIs to use the dSterling as a secure, liquid asset with potential regulatory acceptance for safeguarding.
While the pilot won’t feed directly into the HMT/BoE’s consultation, Mr Jhanji said that the consortium will share its findings with the central bank. “And if useful, then they can take our results and use it in addition to the consultation responses received from the market,” he explained. As a private market initiative, he believes that the pilot could prove useful in testing some of the challenges identified in the consultation.
The pilot phase is expected to run for 18 to 24 months from April, following the formation of the consortium.
Joy Macknight is editor of The Banker. Follow her on Twitter @joymacknight
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