On 7 June 2021, the Bank of England (BoE) published a Discussion Paper that seeks to broaden the debate around new forms of digital money.
The Discussion Paper sets out the BoE’s emerging thoughts on new forms of digital money, which include both systemic stablecoins and a UK central bank digital currency (CBDC). It builds on the BoE’s previous Discussion Paper on CBDC published in March 2020 and the Financial Policy Committee’s expectations for stablecoins set out in the December 2019 Financial Stability Report. The BoE has not yet made a decision on its detailed regulatory approach to stablecoins, or on whether to introduce a CBDC in the UK.
For the purpose of the Discussion Paper, new forms of digital money are assumed to be denominated in sterling. Unlike crypto-assets such as Bitcoin, which do not have an anchor, they are also assumed to be backed by assets that make them stable in value. But, unlike commercial bank money, it is further assumed they would not be created by lending to the real economy.
The Discussion Paper focuses on new forms of digital money that have significant potential to be systemic. In the context of new forms of digital money, the precise definition of ‘systemic’ will need to be refined. For the purpose of the Discussion Paper it is taken to mean that new forms of digital money have the potential to scale up and grow rapidly, and to become widely used as a trusted form of sterling-denominated payments by households and non-financial businesses – referred to collectively as ‘retail payments’ – in the UK.
The deadline for comments on the Discussion Paper is 7 September 2021.
The BoE has also summarised the responses to its March 2020 Discussion Paper on CBDC. The BoE states that respondents showed strong agreement that the BoE should, at the very least, be carefully studying CBDC, even if there was a range of views on whether one was ultimately likely to be needed or desirable.
The BoE has identified five core principles from the responses which will guide its future exploration of CBDC. These include:
- Financial inclusion should be a prominent consideration in the design of any CBDC.
- A competitive CBDC ecosystem with a diverse set of participants will support innovation and offer the best chance to deliver the benefits of CBDC.
- In assessing the case for CBDC, the BoE should assess whether non-CBDC payment innovations could deliver the same benefits.
- A CBDC should seek to protect users’ privacy.
- While CBDC should “do no harm” to the BoE’s ability to meet monetary and financial stability, opportunities to meet policy objectives more effectively should also be considered in CBDC exploration. The BoE is primarily focused on the possible benefits CBDC might bring for ‘payments’. It is also considering the possible opportunities that CBDC may offer for monetary and financial stability.