Thursday 26 January 2023 11:33 am

A CBDC ‘digital pound’ looks on the cards, despite concerns from Bank of England chief

The winds of fortune appear to be turning in a favourable direction for the prospect of creating a digital pound, despite the best efforts of the Bank of England’s Governor to nip the idea in the bud.

Andrew Bailey (pictured), who has held the position of Governor since 2020, recently put the boot in on the notion of a central bank digital currency (CBDC), telling ministers at the Treasury Select Committee that he wasn’t sure there was a need for a CBDC.

“I think it’s an open question whether a wholesale digital central bank currency is needed because we’ve got a wholesale central bank money settlement system with a major upgrade,” the central banking stalwart said.

“We have to be very clear what problem we are trying to solve here before we get carried away by the technology and the idea.”

The committee’s assembly coincided with a similar meeting of euro zone finance ministers who agreed to support continued preparatory work for a digital euro – something being taken very seriously by the European Central Bank.

However, while Bailey’s deep concerns are being mooted in the corridors of Whitehall, other forces within the Bank of England itself are quietly getting on with the business of ushering an era of CBDCs.

Over the coming weeks, in tandem with updating its real-time gross settlement system (RTGS), the BoE is due to launch a public consultation on what the attributes of a digital pound should be.

On Tuesday, the Bank will also announce which blockchain company has won the contract to create a wallet for its CBDC experiment. Tenders were invited in early December and saw a total of 20 firms submit applications for the £200,000 five-month project.

It is understood the contract is purely to establish a prototype for user experience testing, and not a clear statement of intent from behind the robust doors of Threadneedle Street.

What is clear, however, is a definite groundswell of support leaning towards entertaining the idea of a CBDC – a motion described as “an exciting and important development” by Julia Demidova, Head of Digital Asset and Product Strategy atFIS Global– a provider of core processors for many of the world’s financial institutions.

“Stablecoins are taking off and becoming more mainstream, with increasing institutional support, and will almost certainly change the payments landscape,” she said.

“We could see a system in which we have multiple stablecoins pegged to the pound, co-existing and interoperable with a Central Bank Digital Currency (CBDC).

“At the same time as the Treasury explores this new stablecoin, the Bank of England is busy working on the introduction of a UK CBDC. While I anticipate that a CBDC infrastructure will take longer to develop, it could have a number of benefits for the UK financial system.

“A CBDC could see many bank fees eliminated and foreign currency exchange risks substantially reduced. While central bank money would remain the preferred method to settle mid-to-large transactional volumes, a CBDC could broaden access to central bank money and bring new functionalities. It can also serve as an instant and atomic settlement medium for Payment versus Payment (PvP) between two digital currencies.”

Demidova added she believes CBDCs could improve and create effective distribution of central bank liquidity.She said: “Another key benefit of CBDCs is improved efficiency and reduced risks. For example, the foreign exchange market struggles with long delays in trading and settlement, but it also lacks transparency, which creates unnecessary risk. The main risk today is a settlement risk. CBDCs offer instant risk-free settlement 24/7 and could reduce delays and offer lower costs.“In 2022, payments totalled £6.5 quadrillion globally and, according to our research, payments across retail and wholesale are expected to grow annually at 3.6% to £9 quadrillion by 2030. Both wholesale and retail are expected to grow annually by 3.5% and 4.1%, respectively. The wholesale segment, which includes cross-border payments, dominates at ~80% of total payments.“Wholesale CBDCs are similar to large-value payment systems, intended for the settlement of interbank transfers and related wholesale transactions by regulated financial institutions. They may encompass settlement of digital assets enabling Delivery-versus-Payment (DvP) in the future. Wholesale CBDC can introduce new digital financial market infrastructure. Some countries may allow corporates to directly access wholesale networks. Wholesale CBDCs could enable atomic and more efficient settlement.”

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