Bank of Englands experiments with digital bank currencies: plans and challenges

The Bank of England Plans Experiments with Distributed Ledger Technology and Wholesale Central Bank Digital Currencies

The Bank of England has announced plans to conduct a series of experiments with distributed ledger technology and wholesale central bank digital currencies (CBDCs) to assess their impact on the evolving payments landscape. The goal of these actions is to understand the potential benefits and challenges associated with introducing a central bank digital currency.

Wholesale Central Bank Digital Currency in Response to Monetary and Payment Technology Developments

According to the Bank of England’s plans, the development of a wholesale central bank digital currency is a response to the rapid advancement of monetary and payment technologies. Wholesale CBDCs are digital versions of a country’s currency intended solely for financial institutions, facilitating transactions between banks and other financial entities.

Interoperability Challenge and Synchronization Interface

The central bank recognizes the “interoperability challenge,” which involves the creation of systems by different jurisdictions that “cannot effectively interact with each other.” To address this, the regulator aims to develop a “synchronization interface,” a tool enabling the transfer of assets from one side to another on an external platform, while effecting a cash transaction on a real-time gross settlement platform.

Use Case Testing and Public Opinion

The Bank of England plans to conduct tests on use cases, functionalities, and projects of wholesale CBDCs and their synchronization. At the same time, the institution seeks public opinion on the proposed approach, which is considered a significant factor to be taken into account during any potential implementation.

The Bank for International Settlements Warns Against Issuing Retail CBDC Versions

In June, the Bank for International Settlements issued a report indicating that the majority of central banks are avoiding issuing retail CBDC versions in the medium term, with only 12% of respondents expressing plans in this regard. The BIS report also points to a higher likelihood of issuing wholesale CBDCs in the next six years, with the potential emergence of nine such currencies “by the end of this decade.”