Two forms of (digital) money and the future of UK Central Bank Digital Currency

Much discussion is underway on the evolution of new forms of digital money. According to PwC’s recent global survey of financial services organisations, Central Bank Digital Currencies (CBDCs) and private sector cryptocurrencies are predicted to have the biggest disruptive impact on the sector over the next 20 years. But how much of the concept of a separate public sector and private sector money is actually new?

The BoE’s latest discussion paper on digital money calls for views on UK CBDC and private stablecoins (cryptoassets reducing volatility by pegging their value to fiat currencies). The BoE and regulators have long voiced concerns over cryptocurrencies (such as Bitcoin), which contain no backing or anchor to provide stability of value, and therefore pose a risk particularly to inexperienced retail users. The FCA’s recent research uncovered that, while the ownership of cryptocurrencies in the UK has risen over the past year, the overall understanding of the asset class has declined.

The BoE is also concerned about its role in defining monetary policy and managing financial stability. A UK CBDC (informally dubbed BritCoin) would become a legal tender, backed by an asset held on the Bank’s balance sheet. The BoE would be responsible for maintaining confidence in it and allow the digital currency to be used to underpin, for example, regulated, digital securities. It would also help the BoE respond to new, privately created forms of digital currencies.

Privately issued stablecoins, on the other hand, would need to comply with both payments and banking regulatory regimes, allowing the BoE to maintain its full oversight. Recent speeches from the BoE and other bodies suggest the bar will be set very high, and will include a capital add-on.

The BoE makes no promises on the issuance of a new form of digital cash, but acknowledges the potential benefits. These include reduced transaction costs, better functionality as well as increased innovation, competition and financial inclusion. However, on the flip side, the challenges around data protection, privacy, money laundering and cyber crime would require careful management.

For now, the BoE’s senior team seems to be singing from the same, carefully curated hymn sheet. There are already two distinct forms of money in circulation: central bank money (cash) and private money (bank deposits). UK CBDC as public money and stablecoins as private money are therefore nothing new, rather the technology behind them is.

As Sir Jon Cunliffe, the BoE Deputy Governor, pointed out in his recent speech, today’s public money is cash and probably the image most people think of when they picture money. “However, the majority of the money held and used by people in the UK today is not physical ‘public money’, issued by the state, but digital ‘private money’ issued by commercial banks. Around 95% of the funds people hold that can be used to make payments are now held as bank deposits rather than cash,” he said.

There is no doubt CDBCs globally will be the next big game changer in the world of banking and payments. More than half of central banks are currently considering CBDC and many are already testing it. As the use of physical cash keeps declining, central banks will need to find innovative ways to maintain their long-term control over the financial systems. But it does not have to mean that the fundamentals and regulatory standards will change.

Further reading

• ‘Do we need public money’? | Jon Cunliffe, Bank of England
• Innovation to serve the public interest | Andrew Bailey, Bank of England
• Stablecoins: What’s old is new again | Christina Segal-Knowles, Bank of England
• Central Bank Digital Currency: An update on the Bank of England’s work | Tom Mutton, Bank of England
• EMEA Payments and Open Banking Centre of Excellence

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