Bank of England appears to backpedal on CBDC plan

The Bank of England (BoE) is reportedly considering ending its development of a central bank digital currency (CBDC) in the hopes that the private sector will provide better payment innovation.

According to a report from Bloomberg, the BoE has been “privately urging” the banking industry to accelerate alternative payment innovations instead of a CBDC. Citing “people familiar with the matter,” the report suggested that the BoE has indicated it wants to be in a position to launch a CBDC if needed, but it is willing to step back if the private sector continues to produce new electronic payment technologies.

The sources also suggested that the central bank’s staff believe the potential gains from going ahead with a digital pound launch have diminished.

A digital pound CBDC has been in development in the United Kingdom since early 2023, when the HM Treasury published a consultation paper jointly with the BoE titled: “The digital pound: a new form of money for households and businesses?”

The BoE has yet to comment on the Bloomberg report, but the bank’s Governor Andrew Bailey told a House of Commons Treasury Committee hearing last week that he would need “a lot of convincing” to push through a CBDC plan. Instead, he said the BoE would work with banks and the market to develop digital technology in the commercial bank payments systems, arguing “that’s a sensible place to do it because that’s where most of our money is.”

Bailey said that improving commercial banks’ digital payments systems could lead to “huge benefits,” such as combating fraud, reducing costs, and improving late payments to small firms.

“My view is, if that’s a success I question why we need to introduce a new form of money,” he said.

Bailey was keen to emphasize that he was “not saying no” to a CBDC, but reiterated that if the BoE’s work with commercial banks is successful, he would need convincing that the digital pound use case had been made.

Bailey’s comments, combined with the Bloomberg report earlier in the day, appear to signal a notable shift away from the BoE’s previous position that a CBDC would be “likely” needed.

In January 2024, in response to its consultation paper on the digital pound, the BoE said: “The Bank and HM Treasury judged it likely that a digital pound would be needed in the future, and so further preparatory work was justified.” The road to a digital pound

The design phase of the digital pound kicked off in 2023 with a BoE consultation, which received over 50,000 responses.

In January 2024, the BoE and HM Treasury published their responses to the feedback, concluding that it was too early to make a final decision on whether a digital pound is necessary while committing to continued research and design.

In July 2024, the BoE published a discussion paper titled “The Bank of England’s Approach to Innovation in Money and Payments,” in which it outlined four specific desired outcomes in retail payments: singleness of money, innovation, resilience of infrastructure and the wider ecosystem, and effective governance and funding.

The central bank also promised to undertake a series of experiments within the next six months to examine wholesale CBDC settlement compared to the “synchronization” (the coordination of fund transfers between banks to ensure transactions are settled in real-time) of non-CBDC central bank money using the U.K.’s existing real-time gross settlement (RTGS) system, known as the Clearing House Automated Payment System (CHAPS).

Toward the end of 2024, Bailey hinted that improving payments was a priority for the bank during an October 26 speech to the Group of Thirty’s 39th Annual International Banking Seminar: “Harnessing digital technology to improve strikes me as having real potential, say in areas like solving late payment for firms by enabling automatic release of funds when goods are delivered and more widely using encryption technology to prevent fraud.”

He added that “to do otherwise would risk a failure of imagination.”

Based on last week’s events, improved payments seem to remain the number one goal, but whereas the BoE may have previously been looking to a CBDC to provide the solution, it is now leaning towards private sector innovation as the way to modernize outdated systems.

Watch: Finding ways to use CBDC outside of digital currencies