Central Bank Digital Currencies (CBDCs) and other digital currencies – March 2024

It is becoming increasingly difficult to keep up with all of the announcements from a raft of central banks and think tanks but here are some that caught my attention:

• The Bank of England and HM Treasury published their response to the consultation on a digital pound that was launched in February 2023. It proposed:
  • Primary legislation that would guarantee users’ privacy and control.
  • That the Bank and the government would not have access to any personal data and users would have freedom in how they spent their digital pounds.
  • Further public consultation on a digital pound prior to the introduction of primary legislation.
• The consultation paper included a Technology Working Paper which set out a high-level approach to technology design considerations and proposed an illustrative conceptual technology model for a digital pound.

  The Bank and HMT have agreed the following 6 design principles:

design-principles-digital-pound.png

• The preferred model for the Bank and HM Treasury:
  • A platform model whereby the Bank provides the core infrastructure upon which the private sector builds, innovates and delivers value-add services to households and businesses.
  • Should support both new and existing devices; and that existing payments infrastructure should be used to support interoperability.
  • Government or central bank-initiated programmable money should not be pursued, but that user-initiated programmable payments and smart contract functionality would be important for a digital pound system.
• The minutes of the October meeting of the Bank of England’s CBDC Engagement Forum were released. The four sub-groups presented their objectives, expected outputs and timelines:
  • Subgroup 1 (Design options for privacy and the alias service) was to look at privacy-enhancing technologies and aliases. Their discussions would be framed by the UK Data Protection Act 2018, and the output of their work would be a high-level conclusion on a technology solution that could meet privacy requirements.
  • Subgroup 2 (Models of interaction between PIPs) noted that they would focus on alternative models of interaction between PIPs; potentially including direct communication, communication via a central router, and other alternatives.
  • Subgroup 3 (Core ledger technology) explained that they would list options and trade-offs including a ranking of different ledger approaches based on the subgroup’s assessment of those approaches’ suitability to meet the technical requirements set out in the Bank’s Technology Working Paper. It was noted that the considerations around centralised and distributed ledger approaches were not binary, but rather, form part of a spectrum.
  • Subgroup 4 (Requirements for providing a platform for innovation) would assess what a platform for innovation might look like and explore the possible technology requirements for one including questions around where primitives should be hosted and what aspects of the architecture might be standardised.
• The minutes of the January meeting of the Bank of England’s CBDC Engagement Forum were released. This included feedback from the two working groups:
  • Retailer needs which recognised the need to consider smaller retailers and the importance of understanding consumer preferences in general given that payments is a two-sided market, and noted the importance of how retailers would convert between digital pounds and commercial bank money.
  • Offline payments which noted examples of work elsewhere that could usefully inform this group.
• The Bank for International Settlements (BIS) announced six new projects for 2024:
  • Project Leap phase II, aiming to "quantum-proof" payment systems, after establishing a quantum-safe communication channel between the central banks of France and Germany. The project will show how a payment system can be protected from the potential threat of quantum computers, which may be able to break the encryption systems used today to protect financial transactions
  • Project Symbiosis testing the use of artificial intelligence (AI) and big data technologies for supply chain disclosure and adaptation. The project will seek to improve the tracking of Scope 3 greenhouse gas emissions by creating AI-supported methodologies for emissions disclosures by small and medium-sized companies.
  • Project Aurum enters a new phase in which it will study the privacy of payments in retail CBDCs. The goal is to leverage expertise from academia and privacy regulators to advance central banks' understanding of privacy in the design of CBDC systems.
  • Project NGFS Data Directory 2.0 will rebuild the data directory platform of the Network for Greening the Financial System. While the directory's first version was built to systematically identify and map climate-related data gaps, the revised version will aim to facilitate searching and browsing through data sources, making the directory more usable as a public resource.
  • Project Promissa tests the feasibility of tokenising promissory notes, financial instruments that help fund multilateral development banks and other international financial institutions. The project will use distributed ledger technology to simplify their management and transparency. 
  • Project Hertha aims to test the use of network analytics to help identify financial crime patterns in payment systems. It will map current and emerging financial crime typologies in real-time payment systems, drawing upon lessons from instant payment systems and digital asset networks.