Central Bank Digital Currency (CBDC) development is sweeping across the UK with the publication of Project New Era’s Green Paper report ‘A New Era for Money’.
The UK’s Project New Era initiative is being led by The Payments Association (formerly The Emerging Payments Association (EPA)), paywith.glass and other private industry stakeholders, supported by Boston Consulting Group (BCG) as its consulting partner.
The Green Paper advocates for a first of its kind collaboration between central banks, regulators, commercial banks and other financial institutions (FIs) towards the exploration of a retail CBDC in the UK.
The Green Paper will be followed by real-world pilots to address open design questions and mitigate risks. The pilots will generate working data and feedback that central banks and policymakers will use to inform open design questions and enable relevant authorities to make policy decisions.
CBDCs have emerged in recent years in response to the decline in cash payments, the search for payment efficiencies and the emergence of private digital currencies, such as cryptocurrencies and stablecoins. Most central banks are currently researching CBDCs with The Bahamas, Cambodia and Nigeria already launching full implementations. China is expanding its pilot of a ‘Digital Yuan’ to tens of millions of users and India has recently announced a ‘Digital Rupee’, expected by 2023.
In view of the decline of cash payments, there are lots of reasons as to why a country would want to develop a CBDC. The primary benefits include near-instant settlement times, the potential for reduced transaction costs, enhanced security and programmable payments.
Additional benefits like financial inclusion vary in materiality by country; while monetary policy implementation and countering the threat of stablecoins with a CBDC are yet to be established. The report suggests there is potential for a CBDC to power an alternative, regulated digital currency ecosystem that could otherwise be filled by privately issued alternatives such as stablecoins.
“Much has been written about the challenges posed by a retail CBDC, including the macroeconomic risks like bank disintermediation and the role of commercial banks and other FIs in the new ecosystem,” comments Kunal Jhanji, Managing Director and Partner at BCG. “These challenges require the public and private sectors to come together and create an inclusive framework for new infrastructure, legislation and policy that resolves open questions and responsibly unlocks the transformative benefits of digital money for the UK.”
Digital FMI Consortium
To facilitate the development of a CBDC, Project New Era aims to form a private consortium in the UK, (‘Digital FMI Consortium’), with central banks, regulators, and the government kept informed of progress. The consortium will issue dSterling, a digital settlement asset similar to a CBDC, to drive the pilot.
The pilot will focus on core design issues, including the role of commercial bank liability in a CBDC environment, withdrawal limits and other measures as mitigations to deposit disintermediation and other risks identified.
The focus of the Consortium will be to undertake a set of pilots to enable real-world testing of the initial use cases identified – including:
- Retail payments: Delivering benefits of faster payment settlement and potential to reduce transaction costs for merchants. Programmability enabling innovative use cases like conditional payments, and near-instant pay-per-use micropayments.
- Cross-border transactions: Enabling near-instant settlement, reduced transaction costs, and enhanced payment traceability compared with existing solutions. Exploring interoperability requirements in order to future-proof the digital financial market infrastructure (Digital FMI).
- Tokenisation-as-a-Service: Providing infrastructure for future use cases that enables private organisations on the Digital FMI to tokenise and transact assets for use in closed ecosystems with customers or suppliers. The assets can be financial, utility-based, or physical.
- Servicing Payment Institutions (PIs) and Electronic Money Issuers (EMIs): Enabling PIs and EMIs to use the dSterling as a secure, liquid asset with regulatory acceptance for safeguarding. The asset also enables access to an alternative payment rail, given challenges in the industry around non-bank access to banking.
Speaking on the launch of the Green Paper, Tony Craddock, Director General of The Payments Association, says: “The widespread adoption of CBDCs could be as important to the 21st century as the end of the gold standard was to the 20th. Because of the UK’s long-standing position at the forefront of global financial services we have an opportunity to take a leading role in the next generation of financial services. Our next step will be to build a larger stakeholder network from the public and private sector that will be key in building the pilot project.”
Paul Sisnett, Chief Executive Officer at paywith.glass, adds: “Implementing an entirely new form of digital money is a significant undertaking. It is therefore vital that government bodies, policymakers, the private sector and ultimately the consumers who will be using the currency, have high-quality data on which to base their decisions. Through unprecedented collaboration with the most innovative financial services organisations, this is the only initiative of its kind that will generate those data points.”