LONDON–– A new initiative in the United Kingdom is urging a first-of-its-kind collaboration between central banks, regulators, commercial banks and other financial institutions towards the exploration of a retail central bank digital currency (CBDC) in the country.
The initiative is called Project New Era, and 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 organizations have published what they are calling a Green Paper report “A New Era for Money,” which advocates for the widespread collaboration.
According to Project New Era, 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 can use to inform open design questions and enable relevant authorities to make policy decisions.
CBDCs Emerge
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, noted Project New Era, adding that most central banks are currently researching CBDCs with The Bahamas, Cambodia and Nigeria having already launched full implementations. China is also expanding its pilot of a Digital Yuan to tens of millions of users and India has recently announced a Digital Rupee, expected by 2023.
The organization explained the primary benefits of CBDCs include near-instant settlement, the potential for reduced transaction costs, enhanced security and programmable payments - a new breed of automated payment. Secondary 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 Potential
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,” stated 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.”
Other Considerations
Other important considerations from the research, include:
- Cryptocurrency and stablecoin exchange volume growth have both been >1000% across 2020-21, further indicating the potential for CBDCs .
- Central bank CBDC research and broader topic interest is intensifying in response: ~90 central banks analyzed are publicly exploring a CBDC, with a focus on retail applications and three full launches.
- ~70% of these central banks remain in a research phase, with limited public-private initiatives and experimentation.
- Central banks can bring the industry together with an inclusive roadmap for public-private collaboration to address open questions, risks and intended roles left to commercial banks and other financial institutions.
‘dSterling’ to be Issued
To facilitate the effort, Project New Era said it aims to form a private consortium in the UK (“Digital FMI Consortium”) with central banks, regulators, and 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, according to Project New Era.
The Green Paper is available for download here.
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