BoE on central bank digital currency: Not if, but when and how

Posted: 23 May 2018 6:19 pm
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The Bank of England finds it to be very feasible, saying it's not a matter of if, but when, what and how.

The Bank of England (BoE) has published an extensive working paper on its findings for central bank digital currencies (CBDCs).

A CBDC is essentially government-issued cryptocurrency. The concept is being widely explored by different countries that want to unlock the benefits digital currency brings, such as the ability to program money, move funds quickly and seamlessly and otherwise move away from the extraordinarily inefficient systems of today.

The general conclusion of the BoEs findings is that central bank digital currency is actually very feasible and can be done without introducing too many unseemly new risks. The main question, the report says, is what form the CBDC will take, how it's best rolled out and how commercial banks will respond to potentially getting the business of customer deposits yanked away from them.

It proposed three different models and examined each with a special eye to how exactly they could be safely rolled out and whether any of them were especially susceptible to financial instability from bank runs.

  • Financial institution model (Model FI). A system where only financial institutions can access the CBDC.
  • Economy wide model (Model EW). A system where financial institutions can directly access CBDC, and businesses and households can access CBDC through financial institutions.
  • Narrow bank model (Model FI+). A system where financial institutions can access CBDC, and then use a spin-off "indirect CBDC" for its business and household customers.

Model FI

A relatively safe model but maybe not the most inspired, the report seems to suggest. For practical purposes, it notes, this system basically just offers financial institutions a new, highly liquid, highly stable asset class in the form of CBDC and a more efficient way of trading with each other.

Model EW

Under this model, all banks, non-bank financial institutions (NBFIs), CBDC exchanges, households and businesses can have a CBDC account at the central bank itself. But only banks, NBFIs and CBDC exchanges can trade CBDC directly with the central bank. Households and firms can go through the exchanges, which might be standalone entities or banks/NBFIs, to convert deposits between CBDC and pounds.

This puts a buffer between end users and the central bank itself to let the central bank maintain control of the supply via gilts (government bonds) to and from the exchanges, while still allowing CBDCs to enter circulation and get used.

Model FI+

This system is designed to include CBDC as the actual central bank money, and iCBDC as the connected digital currency that people interact with on a day-to-day basis. This separation is designed to provide a buffer between the end user and the central bank to prevent financial instability or bank runs from threatening the central bank itself unduly.

It notes that this model essentially requires digital currency to be effective as the physical cost of storing cash would probably mean the introduction of fees somewhere along the way, making it an undesirable option for end users, which might limit uptake.


The report focused on the need to talk about a specific model of central bank digital currency in order to make any real headway on the subject and laid out those three options as plausible systems to talk around and to explore the impacts of CBDC in more detail.

For the currency itself, the report concluded that for a CBDC to be just as safe as current systems, it must meet the following criteria:

  • Be interest-paying with an adjustable rate
  • Be distinct from and not convertible to reserves
  • Avoid guaranteeing convertibility of bank deposits into CBDC
  • Be issued only against eligible securities

The main question going forwards, it said, is the exact substitutability between bank deposits and CBDC. In other words, will it be a digital currency for everyone to use in their day-to-day lives or will it just be a new kind of financial instrument for financial institutions to shave costs?

Once that's established, the central bank can start diving deeper and examining how commercial banks might respond to some of the new tools offered by CBDC.

Insiders have previously said that the world is "very, very close" to seeing the release of central bank digital currencies, and not just test oddities like the Venezuela Petro. Elsewhere, the world's fourth largest bank, MUFG, is examining how to release its very own digital currency for customers, presenting another possible take on the future of official digital money.

Disclosure: At the time of writing, the author holds ETH, IOTA, ICX, VEN, XLM, BTC and NANO.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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