Bank of England and Singapore regulator accelerate digital currency probes

Bank of England and the UK HM Treasury announced on 9 November that they will conduct a consultation next year into the possible implementation of a UK central bank digital currency.

The "next steps on the exploration of a UK Central Bank Digital Currency" (CBDC), which would be a new form of digital money issued by the Bank of England and for use by households and businesses for their everyday payments needs, would exist alongside cash and bank deposits, rather than replacing them.

The statement further said in 2022, they will launch a consultation which will set out their assessment of the case for a UK CBDC, including the merits of further work to develop an operational and technology model for a UK CBDC.

It will evaluate the main issues at hand, consider the high level design features, possible benefits and implications for users and businesses, and considerations for further work.

This consultation will form part of a ‘research and exploration' phase and helps to inform policy development over the next few years.

No decision has been made on whether to introduce a CBDC in the UK, which would be a major national infrastructure project.

In April 2021, the Bank and HMT initiated the joint CBDC Taskforce to coordinate the exploration of a potential UK CBDC. The Bank also set up the Engagement and Technology forums, where relevant stakeholders from industry, civil society and academia provide strategic and technical input to the work on CBDC.

The 2022 consultation will inform a decision on whether the authorities are content to move into a ‘development' phase which will span several years. A technical specification would follow the consultation explaining the proposed conceptual architecture for any CBDC.

This could involve in-depth testing of the optimal design for, and feasibility of, a UK CBDC.

If the results of this ‘development' phase conclude that the case for CBDC is made, and that it is operationally and technologically robust, then the earliest date for launch of a UK CBDC would be in the second half of the decade.

Economic Secretary to the Treasury, John Glen, said: "This consultation will begin an open discussion on the role a UK central bank digital currency might play in the UK.

"I'd encourage everyone to contribute to the discussion so we can explore the opportunities this could bring, as well as understanding any risks it may pose."

Deputy Governor for Financial Stability, Jon Cunliffe, said: "The plan to publish a consultation next year on CBDC is a crucial step in our policy development, especially as we further our thinking on the pressing issues at hand. What it will do is provide a platform for interested parties and relevant groups to engage with the key questions on the merits of CBDC, and whether the public sector should advance to a development phase."

In a separate development, Ravi Menon, managing director of the Monetary Authority of Singapore also set out his thoughts on a digital currency at the Singapore FinTech Festival on 9 November 2021

In the speech "The Future of Money, Finance and the Internet" Menon said the MAS "frowns on cryptocurrencies or tokens as an investment asset for retail investors. The prices of crypto tokens are not anchored on any economic fundamentals and are subject to sharp speculative swings. Investors in these tokens are at risk of suffering significant losses".

But he added that "MAS is also of the view that blockchains and crypto tokens can bring many potential benefits".

As for central bank digital currencies he said "MAS is embarking on Project Orchid - to build the technology infrastructure and technical competencies necessary to issue a digital Singapore dollar should Singapore decide to do so in future.

"MAS will pursue Project Orchid in close partnership with the private sector, building on the rich findings from the Global CBDC Challenge that MAS launched earlier this year. We have received more than 300 proposals from over 50 countries in response to the problem statements we posed."

Menon said there were three possible reasons for MAS to issue to the public a digital Singapore dollar.

First, a digital Singapore dollar would make available the benefits of using central bank money in the growing world of online transactions. Like notes and coins, a digital Singapore dollar issued by MAS will be safe, widely accepted, and bear the authority of the state. Cash is the ultimate risk-free asset, and means of final settlement. The rapid displacement of cash in favour of electronic payments based on bank deposits or e-wallets is one of the chief motivations for countries like Sweden and China to consider retail CBDCs.

Second, a digital Singapore dollar could possibly foster an efficient and inclusive payment ecosystem. It could make it easier for smaller firms to build new payments and related digital services. Start-ups, for instance, can integrate with the retail CBDC and not need to build their own e-money and user base. This financial inclusion rationale has been a key motivation for countries like Cambodia and the Bahamas to adopt retail CBDCs.

Third, a digital Singapore dollar could mitigate against the encroachment of privately issued stablecoins or foreign CBDCs in Singapore's payments landscape. As these global digital currencies enter our market and become widely accessible in the future, they could potentially displace the use of the Singapore dollar in domestic retail transactions. A digital Singapore dollar issued by MAS that is congruent with the needs of a digitalised economy could go some way to mitigate this risk.