Bank of England’s vision for the digital pound differs from China’s model

Bank of England (BoE) Deputy Governor Jon Cunliffe said the digital pound would likely operate as an account-managed instrument at the “trade level,” instead of a direct to retail user currency, Bloomberg News reported,

Cunliffe — tasked with overseeing the U.K.’s CBDC project — told a panel that policymakers are considering ways to make the digital pound “better for consumers in online transactions.”

He expressed concerns that criminals could exploit a Chinese-style direct-to-user retail model for money laundering and other illegal activities.

“I think it’s very unlikely that any of us would issue a retail CBDC as a bearer instrument.

It would probably be some form of account-based instrument.”

There are many unanswered questions about CBDCs

In December 2021, KPMG’s Global Head of Banking and Capital Markets, Francisco Uría, said central banks have little choice but respond to the threat of cryptocurrencies by issuing  CBDCs. Uría highlighted the inability to manage financial stability and loss of sovereignty as the threats posed by private cryptocurrencies.

At that time, just seven countries operated a program, and sixteen had active pilots. He concluded that the widespread development of CBDCs is “not a foregone conclusion.”

Fast forward to now, the Atlantic Council’s CBDC tracker shows ten countries operate a program, and fifteen have active pilots, suggesting a general hesitancy among central banks to commit to the idea.

Uría pointed out several areas of concern, including the scope for cyber attacks and the impact on the retail banking and payment provider sectors.

On a more macro level, implementing a CBDC could potentially trigger massive ramifications on a country’s lending, investment, and capital flow mechanisms.

The digital pound is to be administered by private payment providers

Despite the concerns, the BoE is exploring the best ways to utilize a digital pound in an online environment.

One model would see the BoE create the infrastructure, but the frontend would be administered by “private-sector payment providers.”

“We will produce the asset and the rails. But the interface with the public would actually be done by private-sector payment providers.”

Such a system directly addresses Uría’s point on the implications of a CBDC on retail banking and payment providers. However, Cunliffe said this model isn’t set in stone, and an alternative would be for retail banks to tokenize and for the BoE to back those tokens “one-for-one.”

The BoE plans to release a consultation paper at the end of this year on the potential impact of a CBDC on the retail banking sector.

As for when the digital pound will launch, Cuncliffe responded by saying it’s likely five or more years away.