On Friday, the Bank of England (BoE) announced a twelve-month collaborative research project with the Massachusetts Institute of Technology (MIT) on central bank digital currencies (CBDCs).
The BoE will be partnering with the MIT Media Lab’s Digital Currency Initiative (DCI) to investigate technical approaches.
The Bank of Canada (BoC) and the Federal Reserve Bank of Boston have similar CBDC projects with MIT’s DCI. The Bank of England says it contracted with MIT in February, and the Bank of Canada announced its relationship just last week. In February, the Federal Reserve Bank of Boston published a report on the initial DCI work.
DCI CBDC approach
That report highlighted how the DCI’s experience contributing code to Bitcoin might influence its work. For example, it rejected using blockchain for CBDC because of speed challenges, and its trials can achieve between 170,000 and 1.7 million transactions per second. However, it uses the same unspent transaction output (UTXO) design that Bitcoin uses.
The DCI also focuses keenly on user agency, giving users control of their own data and privacy. This is important as physical cash enables anonymity, but there’s a growing concern about the lack of anonymity in digital currencies. And few central banks are likely to allow anonymity due to money laundering concerns.
Bank of England CBDC plans
The BoE is considering the issuance of a digital pound due to the declining use of banknotes and the changing payment landscape. In 2020, the Bank issued a discussion paper on CBDCs, which it followed up in 2021 with another paper focusing on the future of money, including stablecoins. Last week it published responses to the 2021 paper.
Last year, the Bank also announced the creation of a CBDC task force alongside HM Treasury. As part of that, it created working groups, including a Technology Engagement Forum (TEF), and in late 2021, the TEF shared two potential models for a CBDC.
While these projects indicate the Bank’s keen interest in CBDC, the BoE has repeatedly stressed that no decision has been made on whether to introduce a CBDC in the UK. However, it has revealed that its focus is on retail rather than wholesale CBDCs as it expects that the private sector will be able to achieve similar results to wholesale CBDCs through a synthetic CBDC.
