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Does the Bank of England’s retail CBDC exploration balance innovation with financial inclusion?

By Puja Sharma

July 31, 2024

  • Bank of England
  • Blockchain Centre
  • CBDC Partnership
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The Bank of England has released a discussion paper announcing its exploration of a retail Central Bank Digital Currency (CBDC). Does the push towards a retail CBDC represent the Bank of England sensibly following in the European Central Bank’s footsteps, or is it just paving the way for the exclusion of cash customers?

Jorge Lesmes, Vice President & Client Partner, Banking at NTT DATA UK&I, said: “The digital pound sounds like a fantastic idea on paper, but the devil is in the details. While the Bank of England’s push towards a retail central bank digital currency (CBDC) is commendable, there are crucial questions that remain unanswered.

“Firstly, how will the digital pound coexist with physical cash without causing disruption? The promise of enhanced competition and innovation is enticing, but we must ensure that digital inclusion doesn’t become an afterthought. Many segments of society still rely heavily on physical cash, and their needs must be addressed to avoid financial exclusion.

Secondly, the issue of privacy cannot take a backseat. The Bank of England needs to assure the public that their digital transactions won’t be under constant surveillance. This requires robust privacy frameworks and transparent operational models to gain public trust.

Lastly, the regulatory landscape must be crystal clear. Tokenised deposits and stablecoins are steps towards a digital economy, but without harmonised regulations, we risk creating a fragmented financial system. The Digital Securities Sandbox is a good start, but it needs to be backed by comprehensive, coherent regulations that ensure stability and security.

The Bank of England’s report on innovation in money and payments outlines the institution’s approach to fostering advancements in these areas while ensuring stability and security. The document addresses the evolution of payment systems and money, highlighting key trends and emerging technologies that could impact the financial landscape.

Key Takeaways:

  • Technological Advancements: The report notes significant changes driven by technology, including digital currencies, mobile payments, and blockchain. These innovations offer benefits such as enhanced efficiency and reduced transaction costs, but also present challenges related to security and regulatory compliance.
  • Central Bank Digital Currencies (CBDCs): The Bank of England is exploring the potential role of CBDCs in the future economy. CBDCs could offer a secure and stable digital form of money, complementing physical cash and traditional bank deposits. The report emphasizes the need for a careful design process to address potential risks and ensure CBDCs support financial stability.
  • Regulation and Oversight: The report underscores the importance of effective regulation to manage risks associated with new technologies. The Bank of England advocates for a balanced approach that encourages innovation while maintaining financial stability and consumer protection.
  • Innovation Ecosystem: The Bank of England supports the development of a robust innovation ecosystem that includes collaboration between financial institutions, technology firms, and regulators. This collaborative approach aims to drive progress while addressing challenges collaboratively.
  • Public Consultation: The report highlights the Bank’s commitment to engaging with stakeholders through consultations to gather feedback and refine its approach to innovation. This inclusive process helps ensure that the Bank’s policies and strategies align with the needs and expectations of various market participants.

Overall, the report presents a forward-looking perspective on how the Bank of England is navigating the evolving landscape of money and payments, emphasizing innovation, regulation, and stakeholder engagement.

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