What will a retail central bank digital currency mean"

The chancellor Rishi Sunak has announced that the Bank of England (BoE) and HM Treasury are creating a Central Bank Digital Currency (CBDC) Taskforce to coordinate the exploration of a potential UK CBDC, which could be issued for retail or wholesale purposes.

What's meant by a retail CBDC? 

Currently, the public can only hold money issued by the BoE in the form of banknotes. Only commercial banks and certain financial institutions can hold electronic central bank money in the form of reserves held in the BoE's real-time gross settlement service.  

Banknotes are being used less frequently than previously to make payments. The majority of money held and used by people in the UK today is not physical public money issued by the government, but digital private money issued by commercial banks.

A CBDC would be a complement to physical bank notes. Unlike bank notes, a CBDC would be electronic, and unlike reserves it would be available to households and businesses.

A CBDC would therefore allow households and businesses to make payments directly and store value using an electronic form of central bank money. If a CBDC were to be introduced in the UK, it would be denominated in pounds sterling so £10 of CBDC would be worth the same as a £10 banknote. CBDC would be a liability of the central bank.  Any CBDC would be introduced alongside, rather than replacing, cash and commercial bank deposits.

The BoE has not yet made a decision on whether to introduce a CBDC. The Taskforce will co-ordinate exploration of the objectives, use cases, opportunities and risks of a potential UK CBDC.

What might a retail CBDC mean for the private sector?

There is likely to be a role for the private sector if the Bank of England proceeds with launching a CBDC. One model contemplated by the Bank is a public-private payment platform. Under this model, the Bank would provide a core ledger which would record CBDC and process payments. The private sector would then be the payment interface providers handling the interaction with end-users (like you or I) and providing additional payments functionality through overlay services.

What are the potential benefits of a retail CBDC?

  • If a CBDC is remunerated via the application of interest, a CBDC could increase the speed by which changes in BoE policy rate are passed onto households and businesses.
  • CBDC could also potentially facilitate better cross-border payments. For example, central banks may be able to work together to link domestic CBDCs in a way that enables fast and efficient cross-border payments. Many other countries are also exploring introducing a CBDC.   
  • It would arguably support a resilient payment landscape. By providing a new way to make payments, it could diversify the range of payment options (particularly for e-commerce where cash can't be used).

What are the potential risks of a retail CBDC?

A CBDC would only have benefits if households and businesses hold it and use it to make payments. This means some funds would be switched out of commercial bank deposits and into central bank money in the form of CBDC. This could reduce commercial bank funding, potentially impacting the level of credit that banks could provide. Consequently a CBDC needs to be carefully designed to manage the impact on monetary policy and financial stability. Key questions are:

  • Should a CBDC bear interest?
  • Should there be limits on the amount of a CBDC that can be held?
  • Should a CBDC be freely convertible into bank deposits or bank notes?

BoE staff have modelled an illustrative scenario of the demand for new forms of digital money, the resulting response of banks and the impact on credit conditions in a Discussion Paper found here.

What's meant by a wholesale CBDC?

A wholesale CBDC would seek to provide improved settlement and payments in financial markets.

Bank of England materials on a CBDC (including a useful webinar) can be found here.