The Bank of England (BOE) has joined the growing number of central banks, exploring the possibility of launching a CBDC after partnering with the Massachusetts Institute of Technology (MIT) for a joint research project.
The twelve-month research project will explore the opportunities, risks, and challenges that introducing a Central Bank Digital Currency (CBDC) would entail in the United Kingdom.
âThe collaboration forms part of the Bankâs wider âresearch and explorationâ into CBDC and will be focused on exploration and experimentation of potential technology approaches. This work is focused on exploratory technology research and is not intended to develop an operational CBDC.â, the BOE said in a statement.
The BOE added: âNo decision has been made on whether to introduce a CBDC in the UK, which would be a major national infrastructure project. Undertaking this type of technical research will help inform wider policy thinking around CBDC.â
An update is expected from the BOE once the research project is concluded.
The announcement means that the BOE has joined the European Central Bank (ECB), the US Federal Reserve, and many other major central banks in exploring the idea of introducing a CBDC.
Table of contents
What is a CBDC?
A CBDC is very similar to stablecoins like USDT and USDC; they are cryptocurrency tokens that track a fiat currency. However, CBDCs are issued by a central bank, and their supply is controlled by the bank.
CBDCs are purely digital, which means they reduce the fees incurred by cross-border transactions and eliminate the third-party risk posed by institutions that operate between a central bank and citizens.
A CBDC builds a bridge directly linking the central bank and citizens, reducing the amount of expensive financial infrastructure needed to transfer money between the two parties.
Why are CBDCs Potentially Useful?
The primary goal of CBDCs is to increase financial inclusion, which involves reducing the number of people who donât have access to a bank account.
This might seem trivial if youâre reading the article in a developed country, but in 20% of the world, people canât access basic financial instruments, and even in the U.S, 5% of adults donât have a bank account.
Lower fees, quick cross-border transactions, and the removal of third parties make CBDCs a potentially powerful tool in helping people in poorly banked regions such as Sub-Saharan Africa access financial services.
âIf designed in a truly inclusive manner, a CBDC could help to provide a level playing field for every citizen to have equal access to digital payments and financial services.â, said Tanja HeĂdörfer, Director of Business Development CBDC, at the banknote and securities company G+D.
A second important feature of CBDCs is that they leverage the security and speed of blockchain technology but donât suffer from the volatility of the traditional cryptocurrency market.
Privacy and CBDCs
One of the main differences between CBDCs and cryptocurrencies is their approach to privacy.
Major cryptocurrency networks such as BTC are decentralized, which means they arenât controlled and monitored by a single person or institution. The privacy of cryptocurrencies is one of the main reasons theyâve become so popular.
CBDCs will almost certainly be closely monitored by the central bank that issues them, reducing the level of privacy they provide to users.
CBDC Implementation
CBDCs werenât on any countryâs radar until a few years ago, but theyâve quickly gained traction, and several central banks have already launched CBDCs.
According to the Atlantic Council, 87 countries are exploring the use of CBDC, nine countries have launched their own CBDC, and 14 countries, including China and South Korea, are currently piloting CBDC projects.
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