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BoE is exploring both wholesale and retail CBDC, but sees limitations

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(Kitco News) - Due to the high level of technical development required, Bank of England (BoE) Deputy Governor Jon Cunliffe thinks that the U.K. is not ready to issue a digital pound as the central bank has yet to gain enough expertise.

Cunliffe made the comments while speaking at the treasury select committee hearing on Tuesday, saying that while there is more than a 50% chance that the BoE would issue a digital pound, the regulator doesn’t have the technical skills necessary to do so just yet.

The deputy governor went on to say that the central bank expects to have the required expertise by the time it moves forward with the next phase of development, which includes testing a digital pound with private sector partners.

“But to move to the next stage, which would be to build a working prototype, to test in a simulated environment and then you’d be into testing in a live environment, then implementation. This next phase is designed to put us in a position to do that,” the deputy governor stated.

As more than 100 jurisdictions around the world work towards the creation of a central bank digital currency (CBDC), it’s important to remember that blockchain is still a relatively new technology when it comes to facilitating financial transactions, and it requires fine-tuning and technical expertise to ensure that it operates as desired.

Limitations of DLT

Cunliffe also used the hearing to offer a more realistic assessment of the current capabilities of distributed ledger technology (DLT), highlighting that it would be unable to achieve the transactions per second (TPS) required to allow the financial ecosystem to function.

“Distributed ledger technology suffers with some real challenges on scalability,” Cunliffe said, “On the retail side of it, we put in 30,000 transactions per second as a base case, going to 100,000. I don't think you can find any distributed ledger technology that gets remotely close to that. I'm not saying it can't. But what a crypto firm or a new payment firm has demonstrated – a proof of concept – is a very different thing to scaling up to using economy-wide or cross-border.”

That said, the deputy governor acknowledged that DLT could have other applications, such as to mediate the sale and registration of real estate.

“We're running projects with the BIS [Bank for International Settlements] Innovation Hub, about a synchronization agent that will be able to synchronize, not just with the financial sector, but within the Land Registry,” he said, referring to Project Meridian, which is looking to develop an intermediary platform that settles directly in central bank money.

He also gave the example of being able to use tokenized assets to make a “house purchase without having to have solicitors and escrow,” adding “There's a lot of experimentation going on.”

Private stablecoin vs. CBDC: The U.K. is exploring both to see which better serves the public

Digital pound design

Speaking more directly about the digital pound, Cunliffe said the design and structure could vary greatly depending on what the CBDC is used for. Both a retail CBDC, which is the digital equivalent of BoE notes and would be used for “general payment purposes,” and a wholesale CBDC, which would be used for interbank transfers and settlements, are being explored.

“At the moment, we see the needs of wholesale and retail as separate,” the central banker said. “It is a much bigger change – societal and economic – than wholesale.”

“The question is not should we try and exploit the new technologies for wholesale. We should, and we’re looking at how to do that [...] and what’s the quickest way,” Cunliffe said. On the retail side, “it's more likely than not" that the digital pound will move forward as the central bank looks to fill the gap amid the declining use of physical cash.

The deputy governor compared a potential digital pound with Apple’s iPhone app store, saying that a CBDC is about “opening a new frontier for people to improve payments and the way in which money is used.”

He also discussed the application of a digital pound for microtransactions. “This will be much, much easier for you to make very, very small payments. So if you wanted to read an article in a newspaper, you wouldn’t have to subscribe to the newspaper. You could pay tiny fractions to do that.”

Cunliffe’s comments come as the U.K. government has ramped up its activities related to the development of a digital pound, with the Treasury putting out a job advert in January looking for a “Head of Central Bank Digital Currency,” according to a LinkedIn post.

The U.K. government is also exploring the possibility of having a third-party private company issue a pound-backed stablecoin to see how that would stack up against a digital pound issued by the BoE, and whether that is a more feasible route to take.

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