The Bank of England is asking the financial sector for feedback on proposals for a central bank digital currency (CBDC).
In a paper, released today (June 7), the BoE said it had not made a decision around whether or not to introduce the currency, but was exploring the pros and cons of introducing a “stablecoin”.
Governor of the BoE, Andrew Bailey, said: “We live in an increasingly digitalised world where the way we make payments and use money is changing rapidly.
"The prospect of stablecoins as a means of payment and the emerging propositions of CBDC have generated a host of issues that central banks, governments, and society as a whole, need to carefully consider and address. It is essential that we ask the difficult and pertinent questions when it comes to the future of these new forms of digital money.”
At present, payments rely on either cash or deposits held with commercial banks. The CBDC would be an electronic form of central bank money provided for retail use, and would therefore be a direct liability of the central bank (instead of private banks).
The proposed CBDC, although a form of cryptocurrency, would be different to bitcoin.
The currency would be issued and backed by the BoE, and would be denominated in sterling and its value would be tied directly to liquid assets.
This would avoid the fluctuations in value seen in particular by bitcoin in the past few years, and mean that the CBDC could be directly exchanged with sterling.
The CBDC would therefore be more similar to stablecoin, the term for a cryptocurrency whose value is pegged to another currency, commodity or other cryptocurrency.
The paper added that in order for new forms of digital money to be widely used as a trusted form of retail payments, “it is essential that the public can have the same confidence in them as they have in existing forms of money.”
Sarah Coles, personal finance analyst, Hargreaves Lansdown, said that essentially, a CBDC would provide a faster, easier and cheaper alternative to the current card payment system.
She added: “It could also be used to create new monetary policy controls if needs be, so it could, for example, be used to deliver ‘helicopter money’ to boost the economy, or if digital money offered interest rates that tracked the base rate they could make the impact of changes in monetary policy more immediate and direct.”
The BoE has highlighted a number of public policy considerations that it would have to take into account before the currency is introduced.
These include access to cash and its declining usage, how new forms of digital money can support innovation in payments, and possible financial inclusion and data protection implications.
It also pointed to potential competition issues in the market for new forms of digital money, and said work needed to be done on outlining the ability of users to switch between different services.