Shearman & Sterling LLP | FinReg | Bank of England Publishes Consultation Paper on Digital Pound
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  • Bank of England Publishes Consultation Paper on Digital Pound

    The Bank of England has published a joint consultation paper with HM Treasury on the possibility of a digital pound in the U.K. It is envisaged that the digital pound would be a retail central bank digital currency, to be used in day-to-day payments by individuals and businesses. It would operate alongside, instead of replacing, cash. The BoE has also published a Technology Working Paper that explores the technological requirements of a U.K. CBDC. At this stage, the BoE is seeking input on the need for the digital pound and its early-stage proposals for the currency's form and function. As in previous communications on the subject, the BoE and HM Treasury emphasize that no decision has been made on whether to introduce a U.K. CBDC. The introduction of a CBDC would take years to implement, with the design phase expected to last until 2026. Responses to the consultation and Technology Working Paper should be submitted by June 7, 2023.

    Key proposals for the digital pound include the following:
    • Interchangeability with cash and bank deposits.
    • The currency would be issued via a central platform operated by the BoE, but users would access the currency via private sector firms (e.g., banks) who would offer wallet services to hold the digital currency. The digital currency user's claim would, however, remain against the BoE (as opposed to the private wallet provider).
    • Neither Government nor the BoE would see any personal data regarding ownership of digital pounds, but the private entities (e.g., banks) offering wallet and other interface services would identify and verify users in the same way as they do for bank accounts today.
    • The quantity of digital pounds that any one user could hold would be limited initially, to reduce any threat to financial stability from a mass exodus from private bank accounts.
    The U.K. government is committed to maintaining access to cash for those who require it – legislation to this effect has been set out in the Financial Services and Markets Bill.
    Discussions around a potential U.K. wholesale CBDC (which would be used for high-value payments between financial institutions) are ongoing. The U.K. already utilizes a form of wholesale digital central bank money via the Real-Time Gross Settlement System, which is a direct claim on the BoE. The BoE is investigating how the existing wholesale system can interact with distributed ledger technology. Giving evidence to a Treasury Select Committee meeting on January 10, 2023, City Minister Andrew Griffith responded to criticism that the U.K. should prioritize the wholesale CBDC over its regulation of stablecoins under the Financial Services and Markets Bill. Mr Griffith noted that the workstreams on CDBCs and stablecoins would move forward in parallel and that it was important to ensure any decisions around CBDCs were based on well-thought-out public policy decisions.

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