Central Bank Digital Identity

Central Bank Digital Identity
Central Bank Digital Identity

The British Parliament’s House of Lords Economic Affairs Committee recently published its report on a British central bank digital currency (CBDC). The report, which was called “Central Bank Digital Currencies: A Solution in Search of Problem?”, broadly concludes that there is no “convincing case” for a British retail CBDC. Or, as I said in my evidence to the committee, “we do not have what you might call a burning platform”.

The fact that there is no burning platform, however, does not mean that we should ignore the topic. The Committee said that it recognised that consumer preferences, changing technology and “the choices of other countries” may shift their view in the future. Therefore, given that it will take forever to sort out the demands of the various stakeholders and investigate architectures and international developments, the Bank of England and Treasury Joint Taskforce should continue their preparations for some future retail CBDC.

This means that in practice we have time to think the issues through and to make sure that when we do have either a public CBDC and/or a variety of private digital currencies, as is frankly inevitable, they will work to the benefit of all stakeholders. And for a variety of reasons, that is more difficult to achieve that it might seem at first glance.

Retail CBDC

If we focus down on a retail CBDC, as the Committee did, there is one particular aspect of such an initiative that I think should propel us forward. I agree with the Committee that there is no immediate requirement, but I think that work should nevertheless press ahead with some urgency: not because of what consumers want or what other countries want, but because I think that the need for some sort of “Britcoin” is primarily to drive new products and services rather than to compete with debit cards or PayPal.

In my evidence to the Committee, I said that this was the best single reason for introducing a CBDC and I agree strongly with the Atlantic Council’s view that a CBDC could help level the playing field for new market entrants. In my view this is a central element of the calculation about when to introduce a UK CBDC and is much more important to UK plc than introducing a new way to pay in the supermarket.

I am thankfully not alone in this view. Professor Eswar Prasad, Senior Professor of Trade Policy and Professor of Economics at Cornell University, New York, told the Committee that the UK has an effective payments system and there is no strong consumer case for a British CBDC but he also commented that “one could still make the user case in terms of the CBDC catalysing additional innovation”.

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Exactly. That innovation agenda is so important, and in the UK it dovetails with the new five-year (ie, to 2027) strategic plan set out by the UK’s Payment Systems Regulator (PSR). In addition to ensuring access and consumer protection, one of the priorities set out in the plan is “foster innovation and competition” in payments. This is a sensible timescale and fits with the CBDC agenda because the Bank of England have already said that the introduction of retail CBDC will be sometime beyond 2025 (and the Federal Reserve exhibit similar caution).

All things considered, 2025 seems optimistic to me, but let’s get the CBDC ball rolling and let’s prioritise a digital currency that is best for society as whole, not one that is best for bankers or best for crypto-speculators or best for IT outsourcing companies.


While I think that a CBDC is needed primarily for innovation, there are of course other reasons for wanting a digital currency. Sovereignty, sustainability and the resilience of critical national infrastructure, for example. Hence I told the Committee (as did the Bank of England) that a CBDC could help to increase the overall resilience of the payments system, which is why a CBDC should be constructed as a parallel system to the existing payments system.

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Note that there is no implication that that parallel system should necessarily be built by the central bank, or, indeed, banks. I had the opportunity to reflect more on this topic at the presentation of the Committee’s report the Royal United Services Institute (RUSI). The findings of the report were presented by Lord King of Lothbury (a former Governor of the Bank of England).

(Lord King wrote in his book “The End of Alchemy” that “money and banking are particular historical institutions that developed before modern capitalism and owe a great deal to the technology of an earlier age”.)

I found the most interesting discussion around the report to be about the private/public interface. Lord King said in essence that there was no need for the Bank of England to develop its own digital currency and that an alternative might be to simply regulate private digital currency effectively.

Given that the UK Treasury have recently announced that legislation will be introduced to bring stablecoins into the UK payments framework, it is certainly practical and I have a great deal of sympathy with that view, but I’m afraid that I ultimately unconvinced. It is not at all clear to me that private actors would put in place digital currencies to either maximise net welfare or meet the wider social goals of public infrastructure.

As the Executive Director of the Bank of Japan said in a recent speech, “it would be difficult for stablecoin issuers to profit from simple digital payments services alone… they would have to look for alternative revenue sources, such as offering advertisement and/or data services”. Thus, there is a danger that competing private stablecoins may not be the best solution for society as whole.

Back to Digital ID

Finally, one of the most important and least-discussed points made in the Lord’s report was nothing to do with payments or money at all. The report notes that witnesses told the Committee that “a CBDC would need to be attached to a digital identification system as the only reliable way to ensure that payments were legally compliant”.

Those witnesses (including me, by the way) were wholly correct to point out that an appropriate digital identity infrastructure is a precursor to a functional CBDC. Indeed, the Governor of the Bank of England, Andrew Bailey himself told the Committee that digital ID would be needed but it was to be determined whether it would be unique to a platform or “broader in terms of your identity”.

Working out how a digital ID will work and its relationship to CBDC is an obvious priority (and not only in the UK). However, the Bank of England’s Discussion Paper mentioned the possibility of digital ID only in passing and the Department for Digital, Culture, Media and Sport’s recent consultation on digital ID does not mention CBDCs at all, so it seems that there is a connection that needs to be made somewhere above my pay grade to get things moving.

That connection is critical. We must get the identity side of the equation right before we continue with the money side of the equation. As I told the Lords’ committee at the beginning of my evidence, “I am a very strong supporter of retail digital currency, but I am acutely aware of the potential for a colossal privacy catastrophe”.

It’s going to take some time to get the appropriate privacy and security platforms into place, so it seems to me that the timescales noted above are further reinforced. It will take time to assess the requirements for a digital currency, to align the introduction of digital currency with wider strategies and. most importantly, to put the requisite digital identity infrastructure in place.