Central Bank Digital Currency: opportunities, challenges and design

Published on 12 March 2020

The Bank of England has published a discussion paper on central bank digital currency (CBDC). Read a short summary below, or watch the webinar. The Bank has also published a summary of the responses to this Discussion Paper.

An electronic form of central bank money

A Central Bank Digital Currency (CBDC) would be an electronic form of central bank money that could be used by households and businesses to make payments. The Bank has not yet made a decision on whether to introduce CBDC, and intends to engage widely with stakeholders on the benefits, risks and practicalities of doing so.

  • A CBDC would be an innovation in both the form of money provided to the public, and the infrastructure on which payments can be made. 

    If a CBDC were to be introduced in the UK, it would be denominated in pounds sterling, just like banknotes, so £10 of CBDC would always be worth the same as a £10 note. 

    Any CBDC would be introduced alongside – rather than replacing – cash and bank deposits.

    A CBDC would not be a cryptoasset or cryptocurrency, nor necessarily based on the technology that powers them (Distributed Ledger Technology).

Money and payments are changing

We’re interested in CBDC because this is a period of significant change in money and payments.

  • The use of banknotes - the Bank’s most accessible form of money – is declining, and use of privately issued money continues to increase, with technological changes driving innovation. 

    These developments provide the public with new ways to pay for goods and services, which support and enable the digital economy, but also present new risks. 

    They raise an important question for the Bank: 

    As the issuer of the safest and most trusted form of money in the economy, should the Bank provide the public with electronic money – or a Central Bank Digital Currency (CBDC) – as a complement to physical banknotes?

Opportunities for the Bank’s objectives

CBDC could present a number of opportunities for the way that the Bank achieves its objectives of maintaining monetary and financial stability.

  • This could be:

    • By supporting a more resilient payments landscape. 
    • By allowing households and businesses to make fast, efficient and reliable payments, and benefit from an innovative, competitive and inclusive payment system.
    • By helping to meet future payments needs in the digital economy and enabling the private sector to create products that support greater choice for consumers, building on our ambitious renewal of the Real Time Gross Settlement (RTGS) service alongside private sector initiatives.  
    • By providing safer and more trustworthy payment services than new forms of privately issued money-like instruments, such as stablecoins. This may be especially important in the future as cash use declines; and
    • By providing a building block for better cross-border payments in the future

    CBDC would also introduce challenges and risks that need to be carefully considered and managed.

    • If significant deposit balances moved from banks to CBDC, there could be implications for the balance sheets of both the Bank of England and commercial banks.
    • This could affect the amount of credit provided by banks to the wider economy, and in turn, how the Bank implements monetary policy and supports financial stability.

    See Chapters 2 and 5.

Designing a CBDC

The March 2020 CBDC discussion paper outlines an illustrative model of CBDC designed to store value and enable UK payments by households and businesses.

  • This model is not a blueprint for CBDC, but rather a basis for further exploration of the opportunities and challenges that CBDC could pose for payments, the Bank’s objectives and the wider economy.

    In this ‘platform’ model of CBDC, the central bank would build a fast, highly secure and resilient technology platform which would sit alongside our Real Time Gross Settlement (RTGS) service to provide the minimum necessary functionality for CBDC payments. This could serve as the platform to which private sector ‘Payment Interface Providers’ would connect in order to provide customer-facing CBDC payment services. 

    See Chapters 3 and 4.

What technology could CBDC use?

Choices around the technology used for CBDC are important as they would have a significant impact on the extent to which CBDC meets our overall objectives.

  • The technology used to power CBDC should be chosen on the basis of our design principles. There are trade-offs between different design principles, so we would have to strike the right balance in order to achieve the Bank’s policy objectives.

    We do not presume any CBDC must be built using Distributed Ledger Technology (DLT), and there is no inherent reason it could not be built using more conventional centralised technology. 

    However, DLT does include some potentially useful innovations, which should be analysed when considering the design of CBDC. 

    Distribution and decentralisation may enhance resilience and availability, but could have a negative impact on aspects such as performance, privacy and security.

    CBDC may be able to provide ‘programmable money’ through smart contracts. There would be a range of options for how this might be delivered.

    See Chapter 6.

Feedback and engagement

This paper aimed to begin a dialogue on the appropriate design of CBDC and an evaluation of whether the benefits of CBDC outweigh the risks. We invited feedback and ideas from the public, technology providers, the payments industry, financial institutions, academics and other central banks and public authorities to 35 questions for further research (see questions in Chapter 7).

We have published a short summary of responses we received to our discussion paper. This takes into account 132 responses across a range of industries and constituencies which ultimately supports the Bank’s continued research into CBDC. These responses form an important part of the work to assess the case for a CBDC – and no decision has yet been taken.

Given the wide ranging implications of CBDC for the Bank’s objectives and the wider economy, any eventual decision to introduce a CBDC would involve Her Majesty’s Government, Parliament and regulatory authorities, and engagement with society more generally. See our Central Bank Digital Currencies page for more updates on the work we are doing on CBDC.