Central Bank Digital Currency: opportunities, challenges and design

A CBDC would be an innovation in both the form of money provided to the public, and the infrastructure on which payments can be made. 

If a CBDC were to be introduced in the UK, it would be denominated in pounds sterling, just like banknotes, so £10 of CBDC would always be worth the same as a £10 note. 

Any CBDC would be introduced alongside – rather than replacing – cash and bank deposits.

A CBDC would not be a cryptoasset or cryptocurrency, nor necessarily based on the technology that powers them (Distributed Ledger Technology).

The use of banknotes - the Bank’s most accessible form of money – is declining, and use of privately issued money continues to increase, with technological changes driving innovation. 

These developments provide the public with new ways to pay for goods and services, which support and enable the digital economy, but also present new risks. 

They raise an important question for the Bank: 

As the issuer of the safest and most trusted form of money in the economy, should the Bank provide the public with electronic money – or a Central Bank Digital Currency (CBDC) – as a complement to physical banknotes?

This could be:

• By supporting a more resilient payments landscape. 
• By allowing households and businesses to make fast, efficient and reliable payments, and benefit from an innovative, competitive and inclusive payment system.
• By helping to meet future payments needs in the digital economy and enabling the private sector to create products that support greater choice for consumers, building on our ambitious renewal of the Real Time Gross Settlement (RTGS) service alongside private sector initiatives.  
• By providing safer and more trustworthy payment services than new forms of privately issued money-like instruments, such as stablecoins. This may be especially important in the future as cash use declines; and
• By providing a building block for better cross-border payments in the future

CBDC would also introduce challenges and risks that need to be carefully considered and managed.

• If significant deposit balances moved from banks to CBDC, there could be implications for the balance sheets of both the Bank of England and commercial banks.
• This could affect the amount of credit provided by banks to the wider economy, and in turn, how the Bank implements monetary policy and supports financial stability.

See Chapters 2 and 5.

This model is not a blueprint for CBDC, but rather a basis for further exploration of the opportunities and challenges that CBDC could pose for payments, the Bank’s objectives and the wider economy.

In this ‘platform’ model of CBDC, the central bank would build a fast, highly secure and resilient technology platform which would sit alongside our Real Time Gross Settlement (RTGS) service to provide the minimum necessary functionality for CBDC payments. This could serve as the platform to which private sector ‘Payment Interface Providers’ would connect in order to provide customer-facing CBDC payment services. 

See Chapters 3 and 4.

The technology used to power CBDC should be chosen on the basis of our design principles. There are trade-offs between different design principles, so we would have to strike the right balance in order to achieve the Bank’s policy objectives.

We do not presume any CBDC must be built using Distributed Ledger Technology (DLT), and there is no inherent reason it could not be built using more conventional centralised technology. 

However, DLT does include some potentially useful innovations, which should be analysed when considering the design of CBDC. 

Distribution and decentralisation may enhance resilience and availability, but could have a negative impact on aspects such as performance, privacy and security.

CBDC may be able to provide ‘programmable money’ through smart contracts. There would be a range of options for how this might be delivered.

See Chapter 6.