On Tuesday, the Bank of England (BofE) ran a webinar as part of its consultation process about a retail central bank digital currency (CBDC). The Bank has not made a decision about going ahead with a CBDC and recently published a discussion paper. During the webinar, the Bank outlined that the model it favors would be a two-tier CBDC which would enable fintechs and the private sector to play a role in the retail distribution of a CBDC.
In cryptocurrency media outlets, the BofE statements were portrayed as endorsing stablecoins. Rather than interpreting comments, we’ve transcribed the relevant sections below. This relates to comments by Ben Dyson, Lead on Central Bank Digital Currencies & Cryptoassets at the BofE.
Stablecoin comments
He spoke about how cryptocurrencies such as Bitcoin lack the qualities of money. “That doesn’t mean that it’s impossible for somebody to improve on that technology and create something that much better fulfills the qualities of money,” said Dyson. “And so, for example, we’ve seen proposals over the last year from large technology firms, for example, to build payment systems and crypto-assets that could function much more as stable money.”
He continued: “Now some of those proposals may introduce new risks. And it’s important for us to look at that and say, if these proposals are responding to a real need, for example, some weakness in an existing payment system or some category of users that are not being served by the existing payments systems, there may be a role for the public sector in addressing some of that need. As well as just leaving it to the private sector.”
“So this really has generated a lot of interest in ideas like central bank digital currency. As we describe in the discussion paper, we’re very interested in whether central bank digital currency can provide benefits complementing existing payment systems. And also how those payment systems will look in five or ten years from now. And we’re thinking a lot about what kind of payment systems are needed in the future and what those future payment needs will be. So there’s a wide range of motivations for doing this work right now.”
Tom Mutton, director of fintech at the Bank of England, was very clear. “The current generation of crypto-assets, do not in our view meet the functions of money. Looking to the future, there is clearly interest in stablecoins,” said Mutton.
He continued: “And the Financial Policy Committee of the Bank of England as been abundantly clear that where a stablecoin is used at scale as a mainstream payment mechanism in systemic payment chains, then it should have the same safeguards and protections, and be regulated to equivalent standards as existing forms of money. Which are typically commercial bank money paid through recognized payments institutions or central bank bank notes.”
The Bank also shared thoughts on private sector involvement in the distribution of a CBDC.
Private sector role in CBDC distribution
A poll during the event asked whether a CBDC should be provided by the BofE on its own, only by the private sector, or a combination of both. The BofE alongside the private sector was the dominant response at 69% compared to 19% for the BofE alone, and 12% for the private sector. Roughly 70% of the 1200 webinar participants participated in the poll.
Manisha Patel, a Senior Analyst for CBDC at the BofE outlined their current thinking.
“We think there’d be a significant role for the private sector here,” said Patel. “Especially towards the user facing services. And I think we’ve kept it fairly broad at this point because we’d be interested in seeing all the models that the private sector are thinking about in terms of how they would deliver a CBDC to users.”
She continued: “In terms of the model that Ben (Dyson) outlined, we have this idea of a platform model where private interface providers would connect via an API to the central bank’s core ledger to provide the transactions. Now the way those payments might work is definitely still up for discussion, in terms of whether every transaction would need to go through the ledger gross or whether they’d be net (recording unclear).”
“But at the moment we think they’d be real time gross settled through the core ledger. In particular, we want to make sure that the payment interface providers can continue to provide inclusive services that are extensible to all future payment needs.”
A poll during the event asked which CBDC opportunities present the greatest benefit. The most popular response was meeting future payment needs in a digital economy at 36%.
“The poll showed that people thought that meeting future payment needs was a big motivation for a CBDC,” continued Patel. “So, in particular, we’d be looking at what offerings the private sector could provide in terms of maybe smart contracts and programmability. Also, maybe things such as micropayments which are a bit more difficult today using existing payment systems.”
Earlier in the webinar, there was a discussion about whether or not a CBDC would use blockchain or distributed ledger technology (DLT). It seems that the Bank was interested in some aspects of DLT but not others. Performance bottlenecks with DLT were highlighted. And it’s entirely possible to have smart contracts and programmable money without using DLT.
Later in the webinar, Patel also spoke about a wholesale CBDC targeted at institutional payments.
Wholesale CBDC seems to be low priority?
“Wholesale CBDC is definitely something that a lot of central banks are exploring, both alongside a retail CBDC,” said Patel. “Obviously, our paper didn’t focus on wholesale aspects, primarily because there are other things happening in this space within the Bank of England.”
“We’ve touched on ongoing renewal of the RTGS (real time gross settlement) service, but also there are other ways that we could be exploring a wholesale CBDC, in terms of some of the cross border work happening internationally in groups such as the G7. And also in thinking about new ways that we could implement technology as well for current payment systems that we have, such as the RTGS service or things like the high value payment system.”
“So, in terms of the scope of this paper, not really considering it. But mainly because there are other things that are happening alongside this as well.”
The response period for the discussion paper is open until 12 June 2020.
As a side note, can you imagine starting a job as Governor of a central bank in the midst of the Corona Crisis? Andrew Bailey took over from Mark Carney at the Bank of England on 16 March.
