Victoria Cleland, Director for Banknotes and Chief Cashier of the Bank of England, gave a speech on FinTech issues on 8 September (see the speech here).
Of particular interest were Ms Cleland’s remarks on the Bank’s long-term research on the wide range of questions posed by the potential of a central bank-issued digital currency (CBDC), including whether a CBDC would be feasible and whether it would benefit the economy and the financial sector, over the medium term. To support its research, the Bank has invited contributions to a set of research questions on the opportunities and challenges that could arise from the introduction of CBDC (see the questions here).
A key question relates to the potential breadth of access to CBDC and the functionality provided. At one end of the spectrum, CBDC could be quite limited and reserved for financial institutions. On the other hand, CBDC could be made available to everybody, allowing businesses and households to hold balances in central bank money and to pay each other in real time with full and final settlement, in an electronic format.
While households are able to achieve this today directly with banknotes, they must use commercial banks or other financial institutions to make electronic payments. In the UK, those intra-bank payments are themselves fully backed by central bank money, eliminating settlement risk. The question is what could the benefits and costs be of removing this layer and of allowing businesses and consumers to transact directly and instantaneously in central bank money?
Providing wide access to CBDC could fundamentally change the structure of the financial system. For example, if a CBDC provided competition for commercial bank deposits, one outcome could be a reduction in deposit funding available to commercial banks, undermining their ability to provide credit to consumers.
Could, and should CBDC be delivered using Distributed Ledger Technology and is this technology the best way to achieve the necessary scalability and resilience? What are the implications on the privacy, and how could the rules for the operation of the DL be managed? The Bank has already undertaken a proof of concept using this technology and it is looking for new opportunities through its FinTech accelerator.