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UK CBDC – Threat or Opportunity for payments industry?

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The transition to electronic money continues at pace and has been accelerated by Covid-19. The Bank of England (the Bank) reports that around 95% of the funds that people hold to make payments are now held as bank deposits rather than cash.

Add to this the rise of cryptocurrency as an increasingly possible mainstream form of payment, and the path to a digital currency future looks ever more likely.

In April 2021, the chancellor announced a new Taskforce between HM Treasury (HMT) and the Bank to explore a UK Central Bank Digital Currency (CBDC), or “Britcoin”. The Bank released its consultation paper on Monday 7 June looking closely at the opportunities and risks of new forms of digital money, including a UK CBDC.

Consideration of CBDCs have already been on the agenda of UK regulators and government over the last few years, driven by competition and the ambition to remain a hub of innovation, according to a UK Finance paper on the matter.

This is a complex and evolving topic, with new perspectives, technologies and thoughts being aired on a regular basis. Many feel that in just a few years the UK could have a fully digitalised central bank currency, which could revolutionise payments.

But what the payments system looks like, as digitalisation continues, is a question troubling central banks around the world.

In China the driver has been the need to navigate through competition against the dominant US and local payment providers – as well as gaining full visibility of the financial system, allowing the central bank to have better supervisory controls.

In Sweden, the e-krona was motivated by falling use of cash and declining central bank influence on the payments system.

The UK Taskforce will need to look at the specific conditions in the domestic market, with one eye on what is working well elsewhere.

While much of the conversation to date has focused on the technology behind cryptocurrencies, or privacy concerns, less has been discussed about key impacts across financial crime, monetary policy, regulation, international interoperability, tax, and sustainability.

These are important areas which should also be key considerations, as they could have a material impact on how CBDCs are deployed and how truly beneficial they are to the real economy.

While there has been more focus on the usage of such digital currency technology on wholesale market infrastructure to date, we feel it is just as important to examine the impact on the real economy.

In this article we look through the lens of retail CBDCs, which are open to all businesses and individuals to hold and use as a form of digital cash.

Key Areas of Impact on the UK Financial System

There are many critical factors to consider in order to realise the opportunity and manage the risk around CBDC. The Bank and HM Treasury (HMT) have set out to look at a range of issues including the use cases for CBDC, functional needs of CBDC users, financial and digital inclusion, and data, cyber and privacy implications. Globally, there has already been a focus on the right technology needed.

Below we examine a few key areas that we believe are important to highlight and explore as critical to the development of retail CBDCs. The paper focusses on financial crime, monetary policy, regulation and international interoperability, as areas where the path ahead is not clear, and which are important to the payments industry.

It also examine the implications of CBDC on tax and sustainability. All these issues have had less emphasis in industry discussions to date yet will be critical in any future rollout.

Financial Crime

The ability to combat illegal activities through introducing a CBDC is a key prize for central banks and governments across the globe. Yet there remain many unanswered questions over the best way to achieve this and what it means for the interaction of central and commercial banks in fighting financial crime.

Monetary Policy and Financial Stability

The threat from private digital currency combined with the ever-decreasing role for cash are powerful drivers for central banks to look at a CBDC. There are several significant possible implications to consider, for both the payments industry and the scope of central bank powers.


It is clear that a CBDC will add another level of regulatory complexity that will require a coordinated and cohesive global regulatory response.

International Interoperability and Cross Border Payments

The current landscape allows users to transact in different fiat currencies internationally and cross border – though limited by inefficiencies, risks and high costs within the ecosystems. However, many feel that through innovation and technology, cross border payments and interoperability could revolutionise the payments industry. One of the methods of achieving this is believed to be through CBDCs that are ‘linked’.


The impact on the tax system may not have been central to the debate so far, but a CBDC in the UK could have some significant impacts, both domestically and globally.

Private Vs Public CBDC Merits Need Examining

There is a live debate over whether a CBDC or a privacy-based cryptocurrency option would be more beneficial. Depending on the design choices made, a central bank may find itself holding a large amount of individual spending data. In addition, there are also complexities around how one would be permitted to use CBDC ‘offline’. Therefore, central banks will need to consider these to determine how they could be implemented such that CBDC will be a catalyst for delivering benefits.

There are a range of significant issues beyond technology that central banks will have to grapple with. Some will be technical and need cross-border alignment, such as tax and meeting the cross-border challenges that may arise. We expect sustainability to be a key consideration, both around the use of energy of some cryptocurrencies, but also the potential power of CBDC to boost greener behaviour. The ripples this creates will need careful attention – especially given the City’s prominence as a financial centre that embraces technology.

The full paper can be found HERE


Source: Payments Cards & Mobile

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