Earlier this week, the Bank of England’s Director of Fintech, Tom Mutton, spoke at a conference in Washington. Addressing the Bankers Association for Foreign Trade’s Global Annual Summit, Mutton spoke about the development of a Central Bank Digital Currency (CBDC) in the UK.
Plans for a CBDC remain at a very preliminary stage in the UK. Last year, the Bank of England published a Discussion Paper “to broaden the debate around new forms of digital money and seek views on the Bank’s emerging thoughts on the subject.” A consultation is now ongoing and a “CBDC Taskforce” has been established. While central bank plans and thinking remain in development, Mutton gave a sense of how the Bank of England is currently approaching the issue.
One particular issue is regarding Distributed Ledger Technology (DLT). Whether CBDCs would use a similar kind of blockchain technology as is used for digital assets like Bitcoin, or whether it would seek to use a centralised technology system, is up for debate. Some crypto advocates, like Matt Hancock, are believe that CBDCs run counter to the ideological underpinning of DeFi: “getting central banks involved is not what this was invented for.”
Interestingly, Mutton suggested decentralised DLT could play a role in a CBDC, at least to an extent: “you can take some of the features of distributed ledger without using the technology in its totality.” And indeed, “there are definitely some features of distributed ledger which we think are potentially very useful in a CBDC system.” Mutton pointed to smart contracts functionality as a particular example of where decentralised forms of technology could play a role in the infrastructure provided by the Bank of England.
There is also the question of privacy. One of the major attractions of crypto is that it allows payments to be made in a private and anonymous way. It seems difficult to believe that a CBDC would facilitate this given that the authorities are rightly concerned about KYC considerations. Mutton emphasised that he “finds it pretty hard to believe that people [using a CBDC] wouldn’t be subject to KYC,” but insisted that this is “separate from questions surrounding privacy and anonymity – that’s something that will have to be considered very carefully.”
While the taskforce and consultation remains ongoing, Mutton suggested a good compromise would be for people to have anonymity after going through an initial authentication process. “Once you’ve authenticated and validated yourself, whether [it would then be] possible to make peer-to-peer transactions – that’s’ something which I think would be a must-have for a CBDC,” Mutton said. Bespoke KYC arrangements that work specifically for a CBDC will need to be found.
Mutton ended by noting that the goal of a CBDC would not to become the dominant form of payment. At the moment, the most widely used payment method is “commercial bank money via payments networks” and it is highly unlikely that a CBDC would ever dominate the retail space. Mutton suggested that CBDCs could “complement and exist alongside things like tokenised bank deposits, instant payments, and stablecoins.” There is no reason why CBDCs should get in the way of private sector innovation and private cryptos, which would have other use-cases. Mutton sees the role of the Bank of England as simply digitalising cash. “All of the research we do shows that, in the UK at least, people really like having the option on cash, even if they are using it less and less.” Their job, then, is to make “central bank money available in digital form.”
There is still a long way to go until we see a digital pound in use. It will be at least the middle of the decade before we see a British CBDC. But as consultations and taskforces steam ahead, it is interesting to have an insight into how the Bank of England is thinking and how a CBDC might work in practice.
Author: Harry Clynch