House of Lords Economic Affairs Committee Call for Evidence: Central Bank Digital Currencies

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This is a copy of the Digital Pound Foundation’s submission to the House of Lords Economic Affairs Committee in response to their Call for Evidence on Central Bank Digital Currencies. The evidence was originally submitted on 22nd October 2021, and published on the House of Lords website here (CDC0033).

Summary of Response


The genie is out of the bottle. The introduction of new forms of digital money – whether public or private in form – is irreversible. And, given that money touches everyone and everything, its implications are enormous. A global race has therefore developed between private and public protagonists – the issuers of these new forms of digital money. The ability to maintain the stability, safety, and security of financial markets and access to money and payments infrastructure is therefore of profound social and political significance for all central banks and governments. These new forms of digital money create opportunities for radical transformation of the ways in which business is done, value is exchanged, and services are provided and received. They also give rise to risks and challenges, which must be recognised and addressed. 

The advent of CBDCs is undoubtedly having a profound effect on jurisdictions globally, as well as the UK. There are numerous CBDC programmes currently in progress in places as diverse as the EU, Canada, Hong Kong, Sweden, Singapore, Cambodia and China. The Bahamas has become the first nation to launch a CBDC, and China’s DCEP (Digital Currency / Electronic Payments system) is in live commercial trials at scale, with the country intimating that it will fully launch in the near future. 

Initially, at least, CBDCs represented a reaction from central banks to proposed new forms of privately issued digital money, most notably Facebook’s Diem (formerly Libra). There has since been a growing recognition of the wider benefits associated with CBDCs beyond their use as payments instruments, such as the opportunities for innovation and competition arising from programmable, digital-native central bank-issued money. Nevertheless, adoption of any CBDC is heavily dependent not only on its technical features, but also the way in which characteristics such as privacy, resilience, security and consumer protection are built into its design and that of its accompanying infrastructure. 

In the DPF’s view, the main issues to be considered by central banks with respect to the introduction of a CBDC include: 

  • The growth of private stablecoin and cryptocurrency payment initiatives, such as Diem, which could result in central banks effectively losing control of monetary policy, financial stability and payments oversight, should such systems attract large monetary flows. 
  • The need for a more efficient, digital-native payments infrastructure, particularly in the cross-border space where speed and cost are still major barriers.
  • Interoperability –  not only at core payment system level and with respect to existing payment systems, but also in the end-to-end payment chain (including those service providers that have entered the market on the back of Open Banking). Furthermore, in order to realise the benefits of cross-border payments, interoperability between different national CBDCs will also be required. 
  • A CBDC could represent a useful tool in delivering monetary policy more efficiently as well as government policy objectives.
  • CBDCs may also be used as a tool for geopolitical influence – a usage which could result in positive or negative outcomes, depending on the perspective of a given jurisdiction and central bank.
  • An appropriately designed CBDC could enable greater financial inclusion – and greater access to other financial services – and open up greater competition for provision of inclusive financial services through non-bank providers.

There are indeed risks associated with the introduction of a CBDC:

  • The introduction of a CBDC could lead to outflows from commercial bank deposits into CBDC holdings, resulting in lower deposit balances being held with commercial banks and hence posing challenges to the ability of commercial banks to maintain their lending abilities, all other things being equal.  The Bank of England has proposed options such as the imposition of limits on holdings in any new forms of digital money, in order to manage the transition towards their adoption at scale, with which we would concur. 
  • Opponents of CBDCs often argue that their introduction would force a central bank into becoming a consumer service provider, or would lead to the disintermediation of commercial banks. This can be avoided with careful design considerations to ensure and maintain the relationships between the central bank, commercial banks, and consumers, if desired (and it should be noted that the Bank itself has explicitly rejected such “direct” CBDC provision models for the UK). Additionally, to the extent development of a CBDC results in greater competition from non-bank providers to fill the roles traditionally played by commercial banks, consumers could benefit as well.
  • Introduction of a CBDC will require financial institutions to assess the impact on all of their front-to-back technology and operational infrastructure and processes. When viewed in the context of the wider wholesale review, re-engineering, modernisation and digitisation required for a successful transition to a digital economy, this is not necessarily a negative development. Nevertheless, the challenges associated with loss of data, sunk investment costs due to CBDC making previous or planned changes redundant, and general re-engineering challenges are all challenges that must be managed.
  • Public trust in a CBDC is vital, in order for successful commercial uptake. Public trust can be negatively impacted, for example, by a perception that the design of the CBDC does not adequately address privacy concerns, that there are insufficient legal safeguards for privacy and autonomous control of personal finances and transactions, and that the use of features such as programmability may violate an individual’s autonomy over their own finances. 
  • There is also a cost associated with adopting new forms of money and payments systems, on the part of businesses and consumers.

Ultimately, however, we note that, given the benefits and indeed the importance of introducing a UK CBDC, given global developments in this space – these can all be managed and mitigated given appropriate planning and resources. In designing its own CBDC, the UK has an opportunity to play to its strengths – and its desired strategic objectives in a post-Brexit landscape – and to develop a CBDC that can contribute not only to maintaining a position of global leadership, but also to lead in the way in standard setting, effective regulation, sustainability and delivery of ESG objectives, for the world of the future. 

Call for Evidence


What are the main issues driving central banks to explore CBDCs?

The proliferation of CBDC projects around the world are motivated by a number of drivers. In the Bahamas, the world’s first fully deployed CBDC, the Sand Dollar, was officially adopted at scale in October 2020. China’s Digital Currency Electronic Payment (DCEP) system is in advanced trials with live users. Jurisdictions including Canada, Sweden, Singapore, and Thailand, amongst others, have recently or are currently engaged in various stages of pilots and experiments.  CBDCs are being taken extremely seriously by actors across a range of sectors, as evidenced by initiatives preceding the Digital Pound Foundation, such as the Digital Dollar Project in the US, and the Digital Euro Association in the EU. 

In the DPF’s view, the main issues to be considered by central banks are:

  • The growth of private stablecoin-based payment initiatives, such as Diem, which could result in central banks effectively losing control of monetary policy, financial stability and payments oversight, should such  systems attract large monetary flows.  Such a scenario could also lead to serious consumer protection issues, given the current absence of sufficient regulatory and prudential oversight, particularly given there is no FSCS type scheme to reduce losses. 
  • The need for a more efficient, digital-native payments infrastructure, particularly in the cross-border space where speed and cost are still major barriers. While improvements in the current world are being implemented, a CBDC infrastructure would represent a digital-native implementation of current and future requirements, using frontier technologies that are not compatible with legacy infrastructures. This can introduce additional elements, such as programmability of money, which can in turn deliver new use cases (i.e.  automated payment of tax or customs duties at the transaction level).  
  • Political and economic considerations – 
    • A CBDC could represent a useful tool in delivering monetary policy more efficiently (e.g. cascading interest rate changes more efficiently across the system) as well as government policy objectives (such as improved delivery of targeted benefits, exploration of novel policy concepts such as universal basic income, or effective use of “helicopter money” as a means of addressing urgent requirements). 
    • CBDCs may also be used as a tool for geopolitical influence – a usage which could result in positive or negative outcomes, depending on the perspective of a given jurisdiction and central bank.  For example, the DCEP may well become a strong tool economically for China as it pursues its “Belt and Road” initiative, particularly in those parts of the world that are heavily impacted by “dollarisation” in response to a weak and volatile national currency. 
  • A need for greater financial and digital inclusion.  There remain significant challenges in effectively delivering financial services and social benefits to the unbanked and underbanked, impacting their ability to fully participate in the economy. An appropriately designed CBDC and its associated digital means of access could enable greater financial inclusion – and greater access to other financial services – and open up greater competition for provision of inclusive financial services through non-bank providers. 

However, we note that there is certainly, at present, a somewhat reactive element to central banks’ exploration of CBDCs, as a response to the creation, by non-bank tech companies as well as by other sovereign states, of new forms of digital or tokenised money that directly challenge the supremacy of central banks in setting monetary policy and stability rules. If that reactive approach remains the primary driver for CBDC exploration, there is a real risk that the broader, non-financial opportunities afforded by new forms of digital money will be overlooked in the implementation of CBDCs. Consideration and practical assessment of the benefits to be gained from wider CBDC use cases and applications is needed on an open and collaborative basis. This is the role that the DPF intends to fulfil, in convening a broad and diverse set of stakeholders to consider all aspects of a future digital money ecosystem, and in assisting, complementing and enriching the monetary, financial and regulatory focus of the Bank of England and Treasury Taskforce. 

It is therefore insufficient, in the DPF’s view, to consider CBDCs as purely the domain of the central bank. The fundamental role to be played by CBDC in the UK’s transition to a digital economy will touch all sectors of the economy and society, with implications for economic and social stability, security and shared values. 

What are the main benefits and risks of a CBDC?

As the Bank of England itself has noted, in its 2021 Discussion Paper on New Forms of Digital Money, the introduction of a CBDC would likely result – to at least some extent in a shift away from commercial bank money deposits. This in turn could represent a potential challenge to the existing fractional reserve banking system, on which the UK is highly dependent (particularly as an economy that is reliant on higher levels of household debt). Nevertheless, it is also possible that innovative forms of financing could arise as a result of the introduction of CBDC and the technological opportunities to which it gives rise. 

The DPF sees five key areas in which a CBDC could deliver benefits for the UK:

  1. Central bank and monetary policy
  • As a meaningful and potentially safer public money alternative to the use of private stablecoins and cryptocurrencies for payments and settlements, by providing a central bank-backed alternative digital currency that preserves consumer protections whilst also enabling the benefits associated with programmable money.
  • With the decline in cash usage and acceptance, the creation of a CBDC would enable the continuation of the wider general public’s ability to hold public (or “central bank money”) as opposed to exclusively relying on private money – whether in the form of commercial bank money, e-money or privately-issued stablecoins – for digital account holdings and digital transactions. 
  • Improvements in monetary policy transmission, and the potential to allow central banks to deploy highly reactive monetary policy measures. In the event that a CBDC is designed to be interest-bearing, it could directly enable interest rate policies to be transmitted more rapidly and efficiently to end-users.
  • CBDCs can be used as a tool in implementing programmes such as digital borders, for example in enabling the digitisation and automation of customs paperwork and associated payments. 

  1. Domestic and cross-border payments infrastructure
  • More efficient cross-border payments infrastructure (for both wholesale and retail/commercial payments), and a more efficient domestic payments infrastructure through developments such as programmability of money.
  • Underpinning a digital-native, comprehensive payments service for government, individual and business users, enabling the legal and regulatory requirements arising from any given payment or transaction to be met in real time.

  1. Transition to a digital economy
  • Enabling the transition to a digital economy and helping to drive innovation. Introduction of a CBDC can drive greater adoption and innovation of transformative technology paradigms such as artificial intelligence (AI), decentralised systems and applications implemented via distributed ledger technology, and the internet of things (IoT). Combining the power of AI and DLT can give rise to a diverse set of new business models and applications associated with internet-enabled, networked hardware devices that can act as digital agents for their owners.

  1. Financial/Digital inclusion and social policy delivery
  • As we have seen, the use cases and benefits associated with CBDC have gained significant traction in the wake of the COVID-19 pandemic, particularly with respect to the potential applications around financial inclusion – including improved capabilities around government distributions, and the achievement of existing and future public policy. 
  • A well-designed CBDC that encompasses principles of universal account access has the potential to enable greater financial inclusion. Payment service providers in a CBDC ecosystem could be incentivised to offer accounts or wallets to those customers that are excluded from conventional banking services. Greater financial inclusion, and more universal access to accounts, can generate wider social benefits, including improved credit ratings, lower costs of transactions (to the users of the services) and access to cheaper credit. 

  1. Financial Crime
  • As highlighted in UK Finance’s half-yearly Fraud Report (22nd September 2021), the level of digital payment fraud through existing payment channels continues to be substantial. Authorised Push Payment Fraud increased by 60% in volume and 71% in value (to £353m) in the first half of 2021 compared to 2020.  The intrinsic characteristics of CBDCs (e.g. their traceability and programmability) provides a strong opportunity for such fraud to be significantly reduced. These same characteristics could also greatly assist in reducing the ability to process proceeds of crime, terrorism financing and money laundering. 

One of the most exciting features of CBDC is the potential for introducing programmable money –  a form of digital money that, by design, allows for the execution of certain software code in the course of a transaction using that money.  Programmable money can offer users – be they individuals, businesses, local authorities or government departments – a means of transacting in which all the consequences and obligations arising as a result of their transaction are managed seamlessly. For example, this could include automated tax reporting and tax deductions at the transaction level, greatly simplifying company accounting procedures and improving the real-time flow of tax receipts to HMRC. For government and local authorities, this could mean better policy delivery (see response to Q1 above), in real time, and for individuals and families it could mean cheaper, easier and more secure access to benefits and entitlements, via digital money, than is currently available. There are indeed risks associated with the introduction of a CBDC, although we note that, given the benefits of introducing one – and indeed the importance of introducing a UK CBDC, given global developments in this space – these can all be managed and mitigated given appropriate planning and resources. Risks include: 

  1. Systemic and structural challenges
  • As the Bank of England itself has noted in its Discussion Paper on New Forms of Digital Money, the introduction of a CBDC could lead to outflows from commercial bank deposits into CBDC holdings, resulting in lower deposit balances being held with commercial banks and hence posing challenges to the ability of commercial banks to maintain their lending abilities, all other things being equal. The same Discussion Paper observes that similar effects could in any case be experienced should the public shift significant holdings and transactions to privately issued systemically important stablecoins. In the DPF’s view, such risks to financial incumbents should not outweigh the potential benefits of digital money for the UK, although we agree that these risks will require management. The Bank has proposed options such as the imposition of limits on holdings in any new forms of digital money, in order to manage the transition towards their adoption at scale, with which we would concur. 
  • Opponents of CBDCs often argue that their introduction would force a central bank into becoming a consumer service provider, or would lead to the disintermediation of commercial banks. We would dispel these myths at the outset, noting that the Bank of England itself, in its 2020 Discussion Paper on central bank digital currency, has explicitly rejected any model that would require the Bank itself to provide accounts to the general public, instead seeking to maintain direct access only to certain service providers (in keeping with the current wholesale payments and accounts model). The DPF – like the Bank – envisages a continued role for commercial banks as well as a broader and diverse range of regulated service providers in the role of Payment Interface Providers in a CBDC system. Additionally, to the extent development of a CBDC results in greater competition from non-bank providers to fill the roles traditionally played by commercial banks, consumers could benefit as well.

  1. Operational challenges
  • Introduction of a CBDC will require financial institutions to assess the impact on all of their front-to-back technology and operational infrastructure and processes. The impact is not limited to payments and settlements systems- introduction of a CBDC, and the associated changes to payments processing, can potentially impact the systems of every function in a financial institution (e.g. sales and trading, trade finance, treasury and lending). When viewed in the context of the wider wholesale review, re-engineering, modernisation and digitisation required for a successful transition to a digital economy, this is not necessarily a negative development. Nevertheless, the challenges associated with loss of data, sunk investment costs due to CBDC making previous or planned changes redundant, and general re-engineering challenges are all challenges that must be managed.
  • Customers of these institutions, including corporates and buy-side financial institutions such as asset managers, will be impacted too, in particular where they have direct interfaces to the bank.
  • In order for implementation and roll-out to be successful, the Bank of England will require intensive cross-industry engagement and collaboration, and a detailed implementation roadmap that will cover the impact on and risks posed to every part of the financial markets ecosystem.
  • We anticipate that CBDC will co-exist with other existing forms of public money for some time, if not indefinitely. Accordingly, CBDC infrastructure should also be designed such that it is interoperable with existing and planned payment infrastructure within the UK and globally, and also with respect to some in-flight upgrades to existing payment infrastructure (such as the UK’s New Payments Architecture), so that these expensive initiatives do not become throwaway efforts. 

  1. Reputational and commercial challenges
  • Public trust in a CBDC is vital, in order for successful commercial uptake. Public trust can be negatively impacted, for example, by a perception that the design of the CBDC does not adequately address privacy concerns, that there are insufficient legal safeguards for privacy and autonomous control of personal finances and transactions, and that the use of features such as programmability may violate an individual’s autonomy over their own finances. Such concerns can be addressed in the design of the CBDC as well as the legislative framework around it. The cost of failing to gain sufficient public trust in a CBDC, and hence sufficient uptake, would likely be a gravitation towards private forms of digital money (e.g. stablecoins) or to cryptocurrency-based payment systems and accounts. 
  • There is also a cost associated with adopting new forms of money and payments systems, on the part of businesses and consumers. Such costs can be addressed in design choices, for example via mechanisms such as interoperability of CBDC with existing payment systems, and by requirements (or subsidies) for payments intermediaries in a CBDC ecosystem to make the on-ramps and off-ramps to CBDC affordable and easily integrated with existing B2B and B2C payments applications. 

Could the proposed benefits of a CBDC be achieved through improvements to existing payment systems?

It is possible that improvements to existing payment systems could deliver some of the benefits associated with CBDC; however, these would be exclusively limited to those benefits associated with payments speed, cost and efficiency (which are, aside from the cross-border aspect, fairly marginal in a purely domestic setting). There are certainly initiatives in progress to upgrade and replace existing payment systems, with the focus being on improvement in certain areas such as speed, standardisation and cost.  These changes, by definition, take time. Current payments clearing infrastructures – at both service provider and financial market level – are still hampered  by the legacy systems underpinning them, which will take time and entail significant cost to upgrade or replace. 

Similarly, introduction of a CBDC is not the only way to address fraud – applying artificial intelligence and machine learning techniques, for example, to existing payments systems, could also provide a solution. However, only the introduction of a fully digital-native form of public money – and one which is, furthermore, programmable – can fully realise the potential benefits, beyond payments efficiencies identified above, addressing issues around fraud and criminal activity as well as financial and digital inclusion, by design. 

It should also be noted that, despite the introduction of the PSR and PSD2, and the transition of payments oversight from the Payments Council to Pay.UK via Payments UK, most innovation and change in payments services is driven by the Fintech and challenger market as opposed to the  central payment systems. The Treasury-approved Kalifa Review of UK Fintech, published in February 2021, recommended that introduction of a CBDC would provide a vital stimulus for the Fintech market, and would result in the ability for it to deliver even greater customer benefits. 

Interoperability between CBDC and existing payment systems will also be a key means of enabling existing systems to deliver greater efficiencies and benefits from a pure payments perspective. 

How should the Bank of England and HM Treasury address concerns over privacy and traceability of payments when exploring CBDC design?

Privacy, and the ability to balance privacy concerns against the capabilities afforded for fraud reduction and anti-money laundering, is a major topic to be addressed in the design of any CBDC. For the end-users of CBDC, the extent to which the CBDC design protects privacy will be fundamental in determining its uptake. 

The DPF recognises that privacy, traceability and data protection are very different concepts. Privacy is about the retention of a degree of anonymity when using CBDC for payments. Data protection is about the controls around retention and sharing of any personal data collected in the course of such transactions. Traceability, on the other hand, is about the ability, when necessary, for the movement of funds to be traceable across the payments system, and is particularly relevant in the context of detection, prevention and enforcement of financial crime measures. 

There are many options for embedding privacy in the design of a CBDC. At one extreme, a CBDC system could allow disintermediated peer-to-peer transactions, thus protecting privacy but potentially at odds with the needs of regulators. It is not necessarily the case that the only alternative to full privacy is a fully traceable system in which it is possible to identify both counterparties to every transaction, in addition to tracking every transaction. Instead, there are numerous other options along the spectrum. For example, users could be allowed to hold CBDC in a private “wallet”, and to be able to transact anonymously up to a certain limit (subject to appropriate KYC / AML checks when on-boarding to these devices and wallets). This would replicate the current limits around cash transactions, and is an option under exploration by some central banks, for example, Sweden’s Rijksbank in its e-Krona project. 

The Bank of England’s proposed model of Payment Interface Providers could also be used to implement privacy by design, for example, by having user and payments data remain in the custody of the providers and being subject to existing data protection requirements, as opposed creating a centralised database in which all consumer and transaction data is transmitted and held.  From a legal perspective, protections could then be implemented allowing authorities to only request data from providers in accordance with narrowly set parameters. Such solutions would not necessarily preclude the ability for a CBDC to have programmable (and perhaps permission-based) functionality allowing for AML, reporting and tax requirements to be met, although this would again require careful design. 

What effects might a CBDC have on the financial sector?

In the DPF’s view, the introduction of a CBDC is of fundamental importance, if the UK is to maintain its position as a global financial centre and to retain – and build upon – its status as a powerhouse for financial innovation and Fintech. As the financial services industry itself becomes increasingly digitised, the need for instantaneous means of settling digital assets grows accordingly. At present, this need is being met through the private sector initiatives (such as JPMCoin and the Fnality International project). 

The introduction of a CBDC – specifically a programmable one – can potentially deliver benefits in the wholesale and capital markets that include but are not limited to the implementation of:

  • Instantaneous cross-border transaction settlement with reduced or eliminated counterparty risk.
  • Predetermined payments made across the trade life cycle of a financial instrument e.g. dividends, subscriptions, coupon payments).
  • Facilitating payments in financial derivatives.
  • Facilitating payment factoring.
  • Conditional payments e.g. on completion of certain contracts conditions, escrow payments.
  • Trade finance – automated payments made on successful presentation of shipping documents.
  • Embedded payments.
  • Enabling Internet of Things (IoT) devices to become wallets and payment devices.
  • Regulatory and legal compliance e.g. automation of regulatory reporting at the point of transaction or payment.

Nevertheless, the introduction of a CBDC will also require work on the part of financial markets participants and service providers, in order to integrate the CBDC into their front-to-back workflows, and to assimilate it into their business models. For the more forward-looking financial institutions, the process of planning and preparing for the introduction of digital money is well underway. We have noted above, in our response to Question 2, the main risks and challenges for the financial sector (under “Systemic and structural challenges” and “Operational challenges”).

What effect might a CBDC have on competition and innovation in the payments and fintech sectors?

With respect to competition and innovation in the payments and Fintech sector, CBDC is the logical extension of PSD2 , Open Banking, ISO 20022 and the New Payments Architecture, enabling the sector to deliver truly digital-native solutions and increasing the scope for innovation. As we have seen with the introduction of PSR / PSD2 and Open Banking, the innovation opportunities created were not necessarily foreseeable at the time – however what mattered was the intent and design behind these regulatory initiatives, and their ultimate goal of opening up opportunities for competition and innovation. 

With respect to the existing payments infrastructure, there is considerable scope for simplification. At present, the UK has six payments infrastructures, most of which operate on different standards and use different networks (e.g. SWIFT for CHAPS). It is a complex landscape for new entrants to navigate, particularly as each different payments infrastructure has its own unique usages, requirements, rules of participation, and limitations. The introduction of a CBDC – as a single, real-time 24/7 payments system – will open up immediate opportunities for payment service providers to develop new value-add overlay services. 

A CBDC, and its supporting infrastructure, should be designed in such a way that it can increase competition by facilitating greater access and innovation by a broad and diverse ecosystem, particularly with respect to new entrants to the market. The current payments infrastructure still concentrates commercial power and market access predominantly amongst the largest commercial banks, and this has not changed despite the regulatory initiatives mentioned above – in large part due to the constraints of the current underlying payments infrastructure. This payments infrastructure has developed organically over decades and, to a large extent, represents a series of modernisations and improvements to a processing system that was originally designed and implemented to support paper-based money. 

CBDC presents an opportunity to design something brand new, that looks ahead to the new use cases opened up by technology advances and the digital age, unencumbered by legacy technological constraints and inherited design “features”.  Furthermore, if implemented as a programmable CBDC with APIs and other external connectivity capability, it can be integrated with other frontier technologies such as the Internet of Things (IoT), AI / ML and distributed ledger technology (DLT), to deliver a range of new use cases in payments and Fintech. 

How might a CBDC affect monetary policy?

Please refer to our response to Question 1 above (“Central bank and monetary policy”). 

Additionally, a CBDC can provide an efficient and direct means of implementing monetary policy at speed – although the extent to which this is possible will depend on the design of the CBDC. For example, a CBDC that is designed to be interest-bearing can be used to quickly implement interest rate changes at scale across the economy (including the ability to implement negative interest rates). With respect to concerns that consumer deposits might flow away from commercial banks to CBDC, the Bank of England could also implement incentives, via raising or lowering interest rates on the CBDC, to influence consumer choices around where and in what format they hold their savings. From a technological perspective, it could simplify and streamline the implementation of quantitative easing measures (particularly when used as the settlement mechanism for digitally-issued government bonds and assets). 

How might a CBDC change the Bank of England’s role and responsibilities?

The extent to which introduction of a CBDC will have an impact on the Bank of England’s own role and responsibilities is largely dependent on the CBDC design and approach that is adopted by the Bank. In the event that the Bank chooses to become a direct provider of CBDC and CBDC payment services to end users, this would require a fundamental change in the Bank’s mandate and remit, as it would need to take on all KYC / AML, account opening and maintenance, and customer services functions with the general public. Given the Bank itself has rejected such a plan in its 2020 Discussion Paper on CBDC, the DPF believes it is unlikely such a model would be chosen.

It is more likely that the Bank will seek to preserve the existing model of intermediated payments and access to central bank money, via the designation of Payments Interface Providers (PIPs). These PIPs would have access to CBDC from the Bank, but would then provide payment services to end users. The Bank would therefore retain its current role in terms of monetary policy implementation and oversight of payment systems and reserves. The nature of these activities may change to some extent depending on the new considerations introduced by a CBDC (e.g. direct implementation of interest rate changes, or use of interest rates as a lever for influencing consumer and market behaviour). 

The Bank will need to give careful consideration to the choice of technology platform underpinning a CBDC, and in particular to the degree it will adopt  centralised or distributed  approaches to technology (i.e. via a distributed ledger technology-based platform), as this choice may have repercussions for its own role in the operation, maintenance and governance of the system. 

How should HM Treasury and the Bank of England engage with the public on the research and development of a CBDC?

It is crucial that HM Treasury and the Bank of England engage with the public at an early stage in their research and development of a CBDC, given the concerns around public trust and confidence that may arise with respect to privacy, surveillance and personal autonomy. Introduction of a CBDC has the potential to bring about profound changes to the nature of money, and how the public engage with it, as well as how the UK Government uses money to engage with their constituents.   

We find the Bank of England’s recent Discussion Papers and its willingness to engage with the public to be a heartening sign at this early stage. That said, the recently announced Bank of England CBDC Engagement and Technology Forums have been largely populated with members of the incumbent financial services community, and there is a risk that key areas of society and the economy will not be fully engaged and heard throughout the process. Dialogue with business and consumer groups such as the CBI, Small Business Federation and Consumers Association will also be key. It is equally important that the charitable sector is engaged, to ensure that all sectors of the public are appropriately represented in the views being considered. Regional workshops should also be considered to ensure appropriate local feedback is obtained.   This approach was successfully used for the Access to Cash panel review, which highlighted the differing challenges faced with respect to cash access and acceptance in different parts of the United Kingdom.

From an implementation perspective, successful adoption will be dependent on a large-scale, trusted programme of education and information in the run-up to launch of a CBDC. 

As an initiative focused on the development and implementation of a well-designed digital Pound and ecosystem for new forms of digital money, the DPF hopes to play a key role in providing insight, representation and diversity of viewpoints to this process. 

How might CBDCs affect the economic foreign policies or geopolitical influence of different countries and economic areas? Are there implications for the effectiveness of economic sanctions?

The UK, at present, has a world-leading financial services industry, in terms of both incumbents and new entrants / challengers, as well as Fintechs. Its regulatory environment is extremely conducive to innovation, and its common law system and ability to adapt to change at pace is the envy of many jurisdictions. However, the UK has unfortunately fallen behind many of its global trading partners and competitors when it comes to the transformational capabilities of new technologies, for example with respect to CBDC, that are increasingly influencing the balance of power in trade and finance. 

In designing its own CBDC, the UK has an opportunity to play to its strengths – and its desired strategic objectives in a post-Brexit landscape – and to develop a CBDC that can contribute not only to maintaining a position of global leadership, but also to lead in the way in standard setting, effective regulation, sustainability and delivery of ESG objectives, for the world of the future. 

There is certainly an advantage to being a first mover, or an early adopter, with respect to CBDC. A jurisdiction that has implemented a well-designed CBDC with design features that appeal to a broad user base, and relatively open access to users outside its own borders, may find its currency in greater demand. Some jurisdictions may start to mandate payments to and from service providers in their own CBDC. If, for example, China were to do this with respect to its “Belt and Road” initiative, the consequences for uptake of its DCEP CBDC and payments system – outside its own borders – would be significant, and could have knock on effects in local economies, effectively leading to a reserve currency status in certain parts of the world. A CBDC, therefore, can have geopolitical impacts, and impacts on the monetary sovereignty of nations. 

The potential to programme rules and restrictions into a CBDC also opens up potential for enforcing economic sanctions, or for cutting outflows of currency to certain jurisdictions based on policy decisions. Such use cases, however, should not be taken lightly as their inclusion in the design of a CBDC could itself negatively impact the uptake and popularity of that CBDC. 

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