Innovation relating to payments and digital assets is accelerating and central bank digital currency (CBDC) initiatives are gaining momentum globally. At Standard Chartered, a UK-based global trade bank, we are participating in CBDC projects across our footprint, including initiatives in Singapore (Project Ubin), Thailand and Hong Kong (Project Inthanon-Lionrock), and the new HM Treasury-Bank of England joint Engagement Forum. Our broader strategy for digital assets includes CBDCs as well as cryptoassets and other blockchain-based activities, across regions, business lines and platforms.

This is the right moment to be closely considering the case for a UK CBDC. As the economy digitises it is critical to explore how central bank money might evolve to support future use cases and needs. There are significant opportunities ahead alongside questions to answer and risks to manageCore principles can help guide these complex discussions, including:

      Establish the policy goal: Clear identification of a CBDC use case and overall policy goals is critical – not least because they will impact design choices and models;

      Collaborate with industry: It is important to continue to work with private entities such as commercial banks in the development of a possible CBDC ecosystem;

      Manage transitions: A carefully coordinated shift to new forms of money, uses and systems will help mitigate disruptions and address risks; and

      Provide certainty: Global banks will hold CBDCs on their balance sheets in the near term, but the regulatory treatment of CBDCs as a digital form of fiat (rather than a cryptoasset) is not yet fully in focus, including prudential treatment.  


We support the investigative CBDC work underway in the UK and the approach to engagement on the part of the UK policy community. We have enclosed our answers to your focused questions below.


We look forward to continuing to engage on this important area and would be pleased to discuss these issues further.


  1. What are the main issues driving central banks to explore CBDCs?


1.1.                      The drivers for exploring CBDCs vary across markets.  As a broad trend, consumer demands for faster, cheaper, and more secure digital payments are driving payment innovation. A CBDC may contribute to cheaper and more efficient payments while also increasing financial inclusion in a digital world. Direct consumer access to central bank money is therefore one possible mechanism for anchoring confidence in payment systems and money in a digital world. At the same time, new privately issued forms of digital money are emerging and in some cases have gained signification traction. Central banks are therefore scrutinising potential risks to consumers and financial stability, particularly if a private form of digital money is adopted at significant scale, displaces commercial bank deposits, and/or becomes systemically important. In this respect, CBDCs that coexist with other forms of digital money can help ensure the availability of reliable exit and recourse options for holders of private forms of digital money by integrating or interoperating with alternative payment ecosystems. This can also help ensure consumer choice and lessen the reliance on one or a few payment systems. A clear and comprehensive regulatory framework for new forms of digital money such as stablecoins is another part of the response to these trends and risks, and we support the development of new rules underway in the UK and other jurisdictions.


1.2.                      The issues and motivations driving wholesale and retail investigations of CBDCs are different. For instance, cross-border wholesale CBDC projects typically seek to reduce settlement costs and times between different central banks, financial institutions and currencies. Retail domestic CBDC investigations identify locally-driven use cases depending on local circumstances and imperatives, such as addressing financial inclusion, ensuring continued access to central bank money, or improving existing payment infrastructure.


1.3.                      Looking ahead, CBDCs may present an opportunity to create an operating system and ecosystem for financial services that can be managed in the public interest. It could enable new and effective forms of supervision, policy intervention, and screening for criminal activity, while also enhancing the UK’s position as a global hub for fintech and innovation.


  1. What are the main benefits and risks of a CBDC?


2.1.                      The possible benefits of a CBDC include improving financial inclusion, particularly where financial products and services are dependent on having access to a bank account. As the use of cash declines and private digital money ecosystems emerge a CBDC would be a widely-available central-bank backed payment alternative, which could enhance the overall resilience and interoperability of payment ecosystems and help maintain consumer confidence. A CBDC may create opportunities for enhanced prudential supervision through direct real-time data access. Potential efficiency enhancements could include faster and/or lower-cost fund transfers or payments, as well as opportunities for programmability e.g., enacting policy through code. Competition and innovation could be enabled by a CBDC platform that allows challengers and incumbents to compete fairly. The design of a CBDC may also lend itself to multi-jurisdictional/currency platforms or applications in trade or cross-border settlement, as investigated by the Bank for International Settlement (BIS) Innovation Hub’s mBridge, or national projects such as Singapore’s Project Ubin. More generally, a well designed CBDC ecosystem would provide the foundation for programmable payments and enable innovation and automation across a range of use cases, including automated settlement, subscriptions for low-value payments and pay-as-you-use structures.


2.2.                      CBDCs can also raise risks, including a significant risk of disintermediation of the commercial banking sector and a disruption to the overall stability of the financial system. This could be caused by a CBDC’s impact to bank funding or the risk of runs on commercial banks (and towards CBDCs) in times of market stress. It may also pose additional cyber security or other operational risks for central banks or other participants in the ecosystem. Consumer privacy concerns are relevant and may be addressed through privacy controls and segmenting or layering activities in the CBDC ecosystem. The realisation of benefits and mitigation of risks will depend on design including the potential use of frictions or limits on CBDC holdings.


  1. Could the proposed benefits of a CBDC be achieved through improvements to existing payment systems?


3.1.                      Some of the proposed benefits of a CBDC, including efficiency gains, enhanced resilience, greater financial inclusion and consumer confidence in digital systems could potentially be realised through improvements to existing payment systems. Others may be more difficult to realise in the context of existing infrastructures, such as codable policy or real-time data flows to supervisors. Policymakers will need to consider whether the use cases and goals that they are trying to unlock require a CBDC, or whether another combination of upgrades to existing infrastructure and investments in new technologies could yield similar results


3.2.                      As a general observation, issuance of a CBDC and improvements to existing payment systems are not mutually exclusive. A CBDC could be a component of improved payment systems and/or interact with existing payments infrastructure. Interoperability (e.g., between payment systems including CBDCs) will be critical going forwards, particularly to enable smooth transitions between formats and infrastructures.


  1. How should the Bank of England and HM Treasury address concerns over privacy and traceability of payments when exploring CBDC design?


4.1.                      It is important to maintain consumer data protection and privacy. It is equally important to screen, monitor and trace transactions to root out fraudulent and criminal activity. The development of CBDCs presents an opportunity to build new and enhanced screening and financial crime mitigation tools. Privacy does not mean anonymity. Many controls to combat financial crime are designed to aid traceability and counterparty identification to establish the purpose of a payment. To execute these controls, the relevant information only needs to be available to select parties including private firms performing identification services. A well-designed CBDC ecosystem may in fact help to increase the privacy of transactions while enhancing traceability and identification of counterparties and the purpose of a payment.  Service providers and regulators will need to continue to work together to strike a balance between privacy of the individual and the integrity of payments and banking ecosystems.


4.2.                      More generally, the privacy standards and levels of protection that apply today should continue to apply to all payment ecosystems including potential private forms of money or a CBDC where a government authority may handle personal data. Public trust in privacy designs could be enhanced through third party reviews of architecture and operations and the use of technologies that enable the public to verify privacy protections, and by integrating privacy controls into systems from the outset. It will also be critical to ensure an even application of data privacy and protection requirements across sectors and entities as new forms of digital money continue to emerge in both the public and private sectors.


  1. What effects might a CBDC have on the financial sector?


5.1.                      The effects will partly depend on the model used for the CBDC ecosystem and the role commercial banks play within it. Consumer behaviour will also determine impacts. We support a public-private model that leverages existing roles and responsibilities, including commercial bank intermediation between the central bank and consumers. An intermediated and competitive financial services sector featuring both incumbent banks and new entrants is good for consumers, who are able to choose from a range of secure and innovative financial services while reducing the risk of activity becoming concentrated in any single service provider or network.


5.2.                      Recent publications from the Bank of England (New forms of digital money, June 2021) and the BIS (CBDCs: financial stability implications, Sept 2021) identify potential impacts on the financial sector if CBDCs replace existing commercial bank deposits, including for bank funding, lending and resilience. These analyses note that a switch to CBDC could erode commercial banks’ deposit base and reconfigure commercial bank balance sheets with attendant increases to the costs of credit. In times of market stress, the availability of a CBDC could cause a run on commercial bank deposits to the comparative safety of a CBDC, which could have an acute impact on financial stability. The degree to which consumers adopt CBDCs – how much and how fast – is therefore a critical variable to consider.


5.3.                      As such, there is a strong case for careful transition models, as recently considered by the Bank of England in its New forms of digital money paper. This will establish breathing room to gauge the effects of a CBDC on the financial sector and allow authorities to monitor and adjust the policy environment as needed, by looking at data relating to bank funding model shifts and impacts on deposits, the overall size of a CBDC issuance and its liquidity, and other market indicators such as lending rates and costs.   


  1. What effect might a CBDC have on competition and innovation in the payments and fintech sectors?


6.1.                      A CBDC network built around programmable money could increase opportunities for financial innovation in the UK, and further contribute to the policy goals of Open Banking and related ongoing UK initiatives. Such a network could give consumers greater control over their finances and the forms of money and financial services they choose to use by establishing an open ecosystem for fintech and incumbent firms to innovate within. There are also opportunities to link money and payments infrastructures to external, third party data sources and improve data-driven services and products relating to risk management, insurance, and wealth management and savings.


6.2.                      A CBDC should enable rather than crowd out private innovation and coexist with other forms of digital money. It is therefore important that a CBDC supports interoperability, meaning it enables switching between forms of money (e.g., CBDCs, new forms of digital money, commercial bank money, e-money) and across payment platforms and ecosystems. Interoperability can help ensure that there is no ‘lock-in’ or ‘closed loop’ effect in any single payment ecosystem, allowing innovative market-led payment options to continue to develop alongside the CBDC. Interoperability will also enable service providers to add CBDC optionality to existing consumer platforms and products, while minimising additional costs for users who may be using existing alternatives. Finally, interoperability can help reduce the reliance on any single infrastructure and support overall payments system resilience


  1. How might a CBDC affect monetary policy?


7.1.                      It is important to ensure that a CBDC does not dilute existing monetary policy tools. Some CBDC designs could enable the implementation of monetary policy, for instance by targeting interventions to specific sectors. The potential impact of a CBDC on monetary policy will need to be factored into key questions around design and distribution, including: are CBDCs interest-bearing? How easy is it to hold CBDCs? How many CBDCs can be held?  Can banks or other intermediaries provide deposit services for CBDCs?


7.2.                      Whether a CBDC bears interest is an important decision point, because both interest-bearing and non-interest bearing structures may have broader systemic impacts. For instance, a non-interest bearing CBDC could make it harder for policymakers to implement negative interest rates as market participants and consumers would instead be incentivised to hold CBDCs, particularly if those holdings are frictionless and cost-free (relative to holding banknotes, for instance). Alternatively, an interest-bearing CBDC could transmit monetary policy effectively; however, this would potentially compete with rates offered by commercial banks and could impact commercial bank funding. These potential trade-offs and desired outcomes in terms of how different forms of money are used will need to be considered in CBDC design choices.


  1. How might a CBDC change the Bank of England’s role and responsibilities?


8.1.                      A CBDC that is directly issued by a central bank to consumers would in theory result in an expansion of that central bank’s roles and responsibilities into account provision, customer onboarding and screening, while also requiring significant investments in cyber security and related capabilities, controls and protections. Any disintermediation of commercial banks could also drive central banks into greater roles in credit provision and allocation.


8.2.                      It is important to note that many leading central banks including the Bank of England have expressed support for public-private models and reticence about expanding too far into roles traditionally played by commercial banks. The BIS has highlighted the benefits of tiered CBDC ecosystems, where each participant plays the role to which it is best suited. This allows public entities to focus and deliver on policy goals, while private entities pursue market-driven goals, compete, and offer innovative value-added services to consumers. The important role that commercial banks play in a well-functioning banking system should be recognised in the adoption of a CBDC and factored into its design, i.e., as a publicly managed system enabling commercial banks and other financial service providers to innovate and compete.


  1. How should HM Treasury and the Bank of England engage with the public on the research and development of a CBDC?


9.1.                      HM Treasury and the Bank of England have been collaborative and forward-looking in their approach to industry engagement to date, including the Bank of England’s 2020 consultation exercise on CBDC: opportunities, challenges and design, its recent consultative document on New forms of digital money, and the new engagement structures jointly established by the Bank and Treasury. We are participating in the CBDC Engagement Forum and we look forward to continuing to work with UK authorities on these important policy discussions. 


  1.         How might CBDCs affect the economic foreign policies or geopolitical influence of different countries and economic areas? Are there implications for the effectiveness of economic sanctions?


10.1.                It is difficult to predict how and whether CBDCs will be used in global commerce and trade.  In general, we note that CBDCs may have cross-border spillover effects. For instance, CBDCs issued by major market central banks could be favoured over local currencies in jurisdictions with volatile currencies or fragile banking infrastructure, which could exacerbate risks or concerns relating to cross-border capital flows and FX rates. When it comes to CBDC design, the degree to which cross-border interoperability and access is built-in will need to be balanced against other policy objectives, including the need to ensure control over who is using the CBDC and its infrastructure (and for what purpose) via adequate screening and financial crime controls.


15 October 2021