- The Bank of England (BoE) joins efforts with MIT to explore Central Bank Digital Currencies (CBDC).
- The recently announced partnership between the BoE and MIT seeks to survey and understand the potential challenges, risks and opportunities associated with the development of a CBDC.
- The BoE stresses that the association is not an indication of plans to develop a CBDC.
The Bank of England (BoE) reported its partnership with the Massachusetts Institute of Technology (MIT) Medi Lab Digital Currency Initiative (DCI) to explore CBDC technology.
The emergence of cryptocurrencies in 2008 with the birth of Bitcoin marked a before and after in the financial system and as a consequence of this the concept of “Central Bank Digital Currency”, or CBDC, emerged.
Although central banks have previously directly implemented electronic money, one CBDC refers to digital tokens, similar to cryptocurrencies, but issued by the Central Bank. This token is pegged to the value of the country’s fiat currency, so a CBDC is the digital form of a country’s fiat currency.
In theory, it is argued that these are capable of promoting financial inclusion, as well as facilitating the implementation of monetary and fiscal policy.
Evaluating a Digital British Pound?
The recently announced partnership between the BoE and MIT seeks to survey and understand the potential challenges, risks and opportunities associated with the development of a CBDC.. For now, it will consist of a 12-month research project.
“The collaboration is part of the Bank’s broader ‘research and exploration’ into CBDC and will focus on exploring and experimenting with potential technology approaches. This work focuses on exploratory technology research and does not intend to develop an operational CBDC.”, explains the press release.
Therefore, the statement emphasizes that the research does not represent any plan to develop a CBDC in the UK.
However, this is not the first CBDC investigation by the Bank of England. In fact, already since 2020 it has been evaluating the technology and public a discussion paper on it. Subsequently, the MIT DCI answered with a document detailing how a CBDC would support the bank’s goal of preserving financial and monetary stability. Following the DCI’s response, the BoE established an exploratory working group dedicated to CBDCs.
Why so much interest?
The question probably arises: Why so much interest in researching the implementation of a CBDC? How is it different from digital money as we know it today?
According to the United States Federal Reserve (FED), a CBDC would differ from existing digital money in that it would be a liability of the Federal Reserve, not the commercial bank.
What’s more, in theory, a CBDC could expand financial inclusion, guarantee access to fiat currencyeven if cash is not available, would improve the efficiency of payment systems, making them faster and cross-border, among other things.
CBDC investigations surge around the world
Currently, the consequences on the implementation of a CBDC is a subject widely debated by world leaders.
In fact, recently the Bank of Canada also reported its association with the MIT DCI to examine “how advanced technologies could affect the potential design of a CBDC“.
Thus, there are currently 87 countries that they explore a CBDC, which represent 90% of the world’s Gross Domestic Product (GDP). While 9 countries have already launched their own CBDC, with Nigeria being the latest to do so.
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