‘While cash is here to stay, a digital pound issued and backed by the Bank of England (BoE) could be a new way to pay that’s trusted, accessible and easy to use,’ said UK treasury chief Jeremy Hunt in February 2023. At that point, HM Treasury and the BoE released a consultation paper outlining the case for a retail central bank digital currency (CBDC), two years after they created a taskforce to explore the benefits and risks of a ‘britcoin’.
A lot can happen in two years. Although the UK Treasury and the BoE judge it likely that businesses and consumers will need a digital pound eventually, this is unlikely to happen until later this decade.
Around 100 countries have CBDC projects, more than 60 at advanced stages of development
‘We want to investigate what is possible first, while always making sure we protect financial stability,’ said Hunt. This caution is understandable for many reasons, including fundamental questions such as whether the UK needs a CBDC.
Former BoE governor Mervyn King has declared that a digital pound would have ‘risks but no obvious benefits’. He has warned of privacy issues, threats to commercial banks, the risk of technical issues with the international payments system and the emergence of multiple systems to rival Belgium-based SWIFT, which is currently the dominant international messaging system for cross-border transactions.
CBDCs have been the subject of speculation since the first cryptocurrency, bitcoin, was privately issued back in 2009. As more digital assets have emerged and more payments become electronic, governments and central banks have moved cautiously towards CBDCs.
According to a US think-tank, the Atlantic Council, around 100 countries have CBDC projects, more than 60 at advanced stages of development, with central bank pilots in around 20 countries, including Brazil, China, Japan, the Philippines and United Arab Emirates.
Preparatory work for CDBCs is long and complex. The Bank of Japan (BoJ) has not yet decided to issue a digital yen – and it may require a referendum. But since 2021 it has experimented with establishing a ledger, making payments, interacting with intermediaries, controlling CBDC amounts users can hold, and more. A BoJ pilot is now focusing on the technical aspects of integration with stakeholders such as banks and intermediary networks, and testing end-to-end payment flows without live retail transactions with retailers.
China’s eCNY network has expanded to 26 cities and 5.6 million merchants
Since 2014, the People’s Bank of China (PBoC) has been developing a CBDC, variously known as the eCNY, digital currency electronic payment (DCEP), digital yuan, digital renmimbi and eRMB. In 2020, trials began in four economically and industrially significant cities, and the eCNY network has since expanded to 26 cities and 5.6 million merchants. In January 2023, the PBoC reported 13.61bn digital yuan in circulation (US$2.01bn), which may increase as eCNY is being embedded in popular electronic payment apps from Alipay and WeChat.
The volume, value and user numbers for electronic payments by these commercial giants dwarf that of China’s CBDC, but initiatives to support domestic use cases are increasing and progressing.
‘While adoption has been low, the broad range of applications suggest that testing, not adoption, is the priority for now,’ says Ananya Kumar, associate director for digital currencies at the GeoEconomics Center. China’s focus is, she suggests, on setting technical and regulatory standards that will shape how other countries’ CBDCs will work.
A future digital pound must be strategically aligned with national and international payment systems
In June 2023, Shanghai Clearing House began supporting the use of China’s CDBC for commodities transactions. This may help to promote the digital yuan in China and internationally. PBoC is also involved in the Bank for International Settlements’ (BIS) Project mBridge, to develop a ledger platform to support real-time, peer-to-peer, cross-border payments and foreign exchange transactions using multiple CBDCs, and ensure compliance with jurisdiction-specific policy and legal requirements, regulations and governance needs.
Although China’s CBDC has yet to be officially launched, in some ways it may be helping to advance the spread of CBDCs more than countries that have launched them – while sharing some of the same teething problems. The Bahamas Sand Dollar was launched in 2020 for retail and wholesale use, then in 2021 Nigeria launched the eNaira, for retail use. Despite great expectations around benefits and adoption, and initiatives to educate, explain, publicise, encourage and support their use, rates of adoption remain low.
The ABC of CBDC
Central bank digital currencies (CBDCs) are digital equivalents of fiat currency. A CBDC isn’t physical, like notes or coins. It does not need to be printed or minted. It is digital money that a country’s central bank can issue alongside cash and, in this way, a CBDC is centralised, state-issued and backed by real-world assets.
There are two types: retail CBDC for use by individuals and businesses; and wholesale CBDC for large-value transactions and settlements by financial institutions.
Back to britcoin
These countries may offer learnings for the UK and others investigating CBDCs. But they highlight just a few of the many threads that must be woven into the dizzyingly complex tapestry that’s needed to support single and multiple CBDCs.
There’s a lot for the UK government, BoE and other stakeholders to ponder. What problems could a digital pound solve? What benefits could it deliver? What are the risks of action and inaction? How are answers to such questions shaped by differences between retail and wholesale CBDC?
The road to a future digital pound (digital dollar, digital euro or any CBDC) is long and winding and must be strategically coherent with national and international payment systems, now and in the future. As Carolyn A Wilkins, senior research scholar at Princeton University Griswold Center for Economic Policy and external member of the BoE Financial Policy Committee, said in a recent speech about the next stage of preparatory work for the BoE: ‘The list of issues that need to be resolved is daunting.’