The UK ranks fifth in the world in efforts to establish a central bank digital currency, according to PwC [from Global Risk Regulator].
The UK is looking to keep the City of London on the cusp of financial innovation by stepping up efforts to establish a central bank digital currency (CBDC).
On April 19, the Bank of England and the UK Treasury formed a joint CBDC taskforce to explore a potential UK CBDC. The taskforce will be co-chaired by deputy governor for financial stability at the Bank of England, Jon Cunliffe, and the UK Treasury’s director general of financial services, Katharine Braddick. The CBDC would be used by households and businesses alongside cash and deposits rather than replacing them.
“The [move] signposts the government’s intention to develop the UK as a significant independent financial services market post-Brexit, along the lines of Switzerland,” says Nigel Brahams, a partner at law firm Collyer Bristow.
The move also raises questions, Mr Brahams says, such as whether the UK CBDC will be asset-backed and if so, whether it will be by the Bank of England’s gold depositary.
“We have to ask whether such a currency would be linked to the pound and whether it will be adopted broadly both in the UK and internationally? If it attains lift-off this could be an exciting opportunity for the UK to shape rather than follow the global crypto agenda,” he adds.
A UK CBDC engagement forum is to be set up involving senior stakeholders, including banks, focusing on the non-technology aspects of CBDCs. It will look at the practical challenges of designing, implementing and operating a CBDC. A CBDC Technology Forum is also being established, involving a wide range of stakeholders such as tech firms and infrastructure providers.
Declining cash use
The move follows from a CBDC discussion paper published by the Bank of England in March last year.
Cash use in the UK has dropped from 63% of all payments in 2006 to just 28% in 2018, according to the central bank, and has shrunk further because of Covid-19.
“As use of cash continues to decline, it is essential that new digital innovations such as CBDCs are set up to work for all consumers and in a way that supports physical notes for as long as it is needed," says John Howells, CEO at LINK, a UK cash infrastructure firm.
“The emergence of CBDC is a big milestone in the evolution of money. It’s a true gamechanger, providing access to alternative payment solutions for citizens and corporates, as well as reinventing financial market settlement and interbank monetary transactions,” says Haydn Jones, UK blockchain and crypto specialist at PwC UK.
Fintechs could build on the existing CBDC infrastructure without having to develop their own or rely on large players.
“A digital currency, backed by an asset held on a central bank balance sheet, will also support supply chains, securities settlement and potentially find its way onto social media platforms.”
The introduction of CBDCs could revolutionise financial services, says Ralf Wintergerst, group CEO at Giesecke+Devrient, a developer of secure technologies.
“The introduction of a CBDC would give more control back to central banks and therefore grant people more security. A state-owned digital currency is always reliably available, is not subject to stock market fluctuations and functions even in a crisis situation without internet, mobile network or power supply,” Mr Wintergerst says
Mr Wintergerst says CBDCs could substantially reduce costs for merchants because at the present credit card operators, payment providers and intermediaries charge merchants a percentage of the transaction.
The introduction of a CBDC does carry the risk that deposit money will be shifted to the digital currency, Mr Wintergerst says. But he adds a digital currency could be designed so commercial banks retain their role as relevant financial service providers. Most developed nation central banks are currently thinking along those lines.
“Fintechs could build on the existing CBDC infrastructure without having to develop their own or rely on large players such as commercial banks that charge for the use of their infrastructure,” he says.
PwC’s first CBDC Global Index shows the Bahamas leading efforts to implement a retail digital currency, followed by Cambodia, with China in third position. When analysing interbank or wholesale projects, Thailand and Hong Kong rank joint first, ahead of Singapore, Canada and the UK. More than 60 central banks have been working on CBDCs.
This article first appeared in The Banker’s sister publication Global Risk Regulator.
