Over the last few years we have witnessed many debates on Central Bank Digital Currencies (CBDCs) - the digital representation of a fiat currency issued by a national state.
Across the globe, these debates have developed into policy consultations, pilots and even some live projects. To date, most activity has been in emerging economies but in the last month we’ve seen significant developments in the US and UK. The UK published a consultation on the future design and use of a retail ‘digital pound’ and a senior official at the US Treasury gave the most in-depth speech on the US’ approach to CBDCs yet. So what can be gleaned from these recent actions?
According to the speech late last week by U.S. Treasury Undersecretary for Domestic Finance Nellie Liang:
- 114 countries, representing over 95% of global GDP, are exploring CBDCs
- 11 countries have fully launched CBDCs
- Central banks in other major jurisdictions are researching and experimenting with CBDCs, with some at a fairly advanced stage.
U.S. financial regulators, including the Federal Reserve, have published discussion papers on CBDC design. In January 2022, the Fed published a 41-page paper on the pros and cons of a potential CBDC, and in response to the White House executive order, the U.S. Treasury released a report The Future of Money and Payments, laying out their thoughts on a digital dollar. The White House framework on digital assets ultimately recommends continued study on the issue of a U.S. CBDC.
But, Liang’s speech last week was perhaps the most detailed discussion of the potential role and design of a U.S. CBDC. Liang explained that while U.S. policymakers continue to debate and discuss, the technology is being developed in order to move quickly once decisions are made.
Liang described three core features that would need to be present in a CBDC:
- That it be legal tender
- That it be convertible one-for-one into other forms of central bank money—reserve balances or paper currency
- That it enable clear and instant settlement
While the speech focused on wholesale CBDCs, which could be a tokenized central bank liability – potentially supporting around-the-clock payment activity, atomic settlement of transactions, certain types of programmability, or other benefits – it also addressed a potential retail CBDC. According to the speech, unlike central bank reserves, a retail CBDC would complement, not replace, cash as a digital liability of the central bank that is accessible to the general public. "A retail CBDC could contribute to a more competitive and innovative payment system; support financial inclusion; and help preserve the singleness of the currency."
The speech lays out key policy goals including U.S. global financial leadership; national security (including sanction efficacy); and privacy, illicit finance, and inclusion.
So, what’s next?
According to Liang, a CBDC working group across financial regulators is developing an initial set of findings and recommendations. These may relate to whether a U.S. CBDC would help advance the policy objectives described above; the features that a U.S. CBDC would need to advance these objectives; options for resolving CBDC design trade-offs; and areas where additional technological R&D would be useful. In addition, the U.S. is working with international allies and partners on this project.
The U.S. is not the only jurisdiction providing thoughts on a potential CBDC in recent weeks.
Last month, following the publication of the future financial framework for crypto assets, the U.K. government released a consultation on the possible use cases and design of a digital pound - dubbed Britcoin by some.
The consultation is consistent in many respects with Liang’s speech and current U.S. policy calling for continued study, discussion and testing. However, the U.K. consultation focuses more on the retail use case of CBDCs rather than the settlement use case (this is being developed in separate work to modernize the UK’s Real Time Gross Settlement system).
When considering the retail use case for the digital pound the government is keen to ensure that the digital pound would complement the role of cash and be used to ensure that if cash were to decline, consumers would still have access to central bank money. In considering the design, the government will prioritize the need for a future CBDC to be highly trusted, accessible and ensure the UK’s financial stability. The Bank of England also sees the digital pound as an opportunity to encourage innovation in the payments space, something that the UK has been well known for.
At the same time, the consultation calls for a digital pound to be subject to rigorous standards of privacy and data protection – neither the government nor the bank would have access to personal data, and holders would have the same level of privacy as a bank account and be subject to the same anti-financial crime controls. In addition, a digital pound would be accessed through digital wallets offered to consumers by the private sector through smartphones or smartcards, underscoring the importance of public private partnerships in the successful development, execution and rollout of a CBDC. The government is considering how digital IDs could be used to facilitate this work which complements other steps the government have been taking to better enable digital lives.
The consultation will close on June 7th, 2023 and we will expect the government to report on its finding by the end of the year. If successful this could set in motion the establishment of a digital pound by 2025.
The CBDC Horizon
Over the last few years, we have seen world leaders and technologists embark on a global discussion of the benefits and challenges of central bank issued digital currencies. While discussions continue in the U.S. and the U.K. countries like China continue to roll out their own CBDCs. According to reporting this week, WeChat, China’s leading social networking and payment app, has added the digital yuan to its payment services. As we move into the next phase of digital payments it will be exciting to see what role CBDC’s play.
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