Earlier last month, the Bank of England and HM Treasury announced the creation of a Central Bank Digital Currency (CBDC) Taskforce, designed to coordinate the exploration of a UK CBDC.
A CBDC refers to a digital currency which is the virtual version of a country’s physical fiat. Unlike other cryptocurrencies such as Bitcoin, a CBDC is centralised, issued, and regulated by a national monetary authority.
As highlighted by Josep Alvarez, UK Head of Banking Practice, NTT DATA UK & everis, in his blog “The beginning of the end for cash”, the pandemic has accelerated the transition away from cash and towards a digital wallet in the UK, and in countless other countries around the world. In fact, research carried out by Link, the UK’s largest cash machine network, shows that ATM transaction volumes fell as much as 62% year over year at the start of the UK lockdown. In many ways, the introduction of a CBDC would be a natural next step, facilitating this increase in contactless transactions and meeting consumer demand.
The UK’s decision to begin considering the possibility of a CBDC is not the first of its kind. This month, the Bank of Japan began experiments to study the feasibility of issuing its own digital currency. The first phase of trials is focusing on testing the technical feasibility of issuing, distributing and redeeming a central bank digital currency.
Similarly, Sweden’s central bank Riksbank, has been exploring the possibility of a CBDC since 2017, looking at how it might work and what technology might underpin it.
So, why all the fuss? Why do CBDC’s matter?
The pros and cons of a CBDC
The UK is a world leader for fintech, and the implementation of a Central Bank Digital Currency (CBDC) would help secure this status for years to come. As a secure and trustworthy form of money, the implementation of a CBDC would ensure monetary and financial stability, safeguarding our place in the global financial market while increasing resilience in payments. Unlike cash and reserves, a CBDC allows a Central Bank to become a household and small business lender, leading to the prevention of an unstable financial system.
As noted above, with the COVID-19 pandemic accelerating our transition away from physical fiat and enhancing the customer appetite for convenient, tech-driven access to financial services and digital payments, the introduction of a CBDC would be key in meeting these shifting consumer demands. Looking forward, the first stage of implementation is likely to arrive with commercial banking, for interbank settlements, before retail banks benefit from the use of a digital currency.
Of course, the introduction of a CBDC will not come without its risks. In the financial market, risks are synonymous with volatility, and volatility encourages financial instability. In order to eliminate these risks, governments must work with their respective central banks to ensure that all of the possibilities have been considered, and that the correct regulation and monetary policy is in place to eliminate threats and maintain value. In the UK, the creation of the CBDC taskforce is a crucial first step in this process, enabling the Government and Bank of England to engage widely with stakeholders on the benefits, risks, and practicalities of a CBDC.
The future of finance
Whilst we are still several years away from the introduction of a CBDC, it is important that we begin the development process now. There are clear benefits associated with a CBDC, both nationally and internationally. It offers a compelling business case: delivering the flexibility and convenience customers expect from modern financial services, combined with the certainty created by government backing. And as a global fintech leader, the UK is in a great position to carve a bold path in this area and continue to be thriving centre for innovation in the international financial market.