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Last updated: June 19, 2025, 17:22 | Written by: Brock Pierce

The world of finance is rapidly evolving, and central banks across the globe are actively exploring the potential of Central Bank Digital Currencies (CBDCs). Staff Working Paper No. 1,1 The role of central bank digital currency in an increasingly digital economy Staff Working Papers describe research in progress by the author(s) and are published to elicit commentsHere in the UK, the Bank of England (BoE) is at the forefront of this exploration.A recent staff working paper from the BoE has shed light on various scenarios, risks, and financial stability issues associated with introducing a digital pound. Staff Working Paper No. 725 Central bank digital currencies design principles and balance sheet implications Michael Kumhof(1) and Clare Noone(2) Abstract This paper sets out three models of central bank digital currency (CBDC) that differ in the sectors that have access to CBDC.This move is motivated by the ongoing decline in transactional cash usage and the significant surge in online sales within the UK economy. Central Bank Digital Currency (CBDC), as are central banks across the world. (1) A Central Bank Digital Currency would be an innovation in both the form of money provided to the public and the payments infrastructure on which payments can be made. At the moment, the public can only hold money issued by the Bank in the form of banknotes.The paper provides a theoretical framework to deeply understand the underlying factors driving these trends and to assess the potential welfare implications of launching an unremunerated retail CBDC.

Understanding the impact of a digital currency issued by the Bank of England is crucial.The paper delves into the complexities of how such a system might function, its potential benefits, and the challenges it could present. Central banks are also exploring linking up domestic tokenised payments infrastructures. In the BIS Innovation Hub s Project Agora, seven central banks, including the Bank of England, will take part in an experiment to test exchanging tokenised commercial bank deposits and central bank money in multiple currencies on a single platform.It also emphasizes the Bank's commitment to engaging with stakeholders to ensure a well-informed and balanced approach to this significant technological and financial innovation.This working paper is a vital piece in the puzzle as the UK considers its future in a digital economy, with the potential for a digital pound to revolutionize how we interact with money.

What is a Central Bank Digital Currency (CBDC)?

To fully understand the significance of the Bank of England's working paper, it's essential to grasp what a CBDC actually is.The Bank of England defines CBDCs as an electronic form of central bank money that could be widely used by households and businesses to make payments and store value.

Electronic Form: CBDCs exist solely in digital format, unlike physical cash (banknotes)
Central Bank Money: Issued and backed by the central bank, making it a direct liability of the Bank of England
Wide Usage: Designed for everyday transactions by individuals and businesses

Essentially, a CBDC would offer a digital alternative to cash, providing a potentially safer and more efficient way to transact in an increasingly digital world. Motivated by the decline in transactional cash usage and the increase in online sales in the UK, this paper provides a theoretical framework to study the underlying drivers of these trends and the welfare implications of introducing an unremunerated retail CBDC.It's important to distinguish a retail CBDC from privately issued cryptocurrencies like Bitcoin.Unlike these decentralized assets, a CBDC would be a form of electronic money directly issued and controlled by the Bank of England, offering a level of stability and trust not found in the volatile world of cryptocurrencies.

The Bank of England's CBDC Exploration: A Multi-Faceted Approach

The Bank of England is not undertaking this exploration in isolation. This type of money is known as a central bank digital currency (CBDC). We are looking at the case for issuing a digital pound, which is a type of money known as a central bank digital currency (CBDC) it would not replace cashIt has established a Joint Taskforce with HM Treasury to thoroughly investigate the potential of a retail central bank digital currency (CBDC) in the UK. BIS Working Papers No 880 Rise of the central bank digital currencies: drivers, approaches and technologies by Raphael Auer, Giulio Cornelli and Jon Frost Monetary and Economic Department August 2025 JEL classification: E58, G21. Keywords: central bank digital currency, CBDC, central banking, digital currency, digital money, distributedThis collaborative effort signifies the importance of a coordinated approach, bringing together expertise from both the monetary and fiscal authorities.

Furthermore, the Bank has also set up a Technology Forum and an Engagement Forum. Central banks are increasingly studying the monetary policy and financial system implications of issuing central bank digital currencies (CBDC). 1 This paper focuses on the sectoral and aggregate balance sheet dimensions of an initial CBDC issuance and of sudden large-scale increases in demand for CBDC.These forums serve to:

Gather insights from technology experts on the technical aspects of designing and implementing a CBDC.
Facilitate dialogue with a wide range of stakeholders, including businesses, consumers, and civil society organizations, to understand their needs and concerns regarding a digital pound.

By fostering open communication and collaboration, the Bank of England aims to ensure that any potential CBDC is designed in a way that effectively serves the needs of the UK economy and its citizens.

Key Considerations in CBDC Design

The Bank of England’s working paper and related discussions highlight several crucial considerations for designing a successful and well-functioning retail CBDC system. Meanwhile, the system design paper provides some perspectives on overall system design and then focuses on four key issues for designing a well-functioning retail CBDC system: privacy, cyber security (including quantum computing), offline functionality and point of sale considerations.These include:

Privacy

One of the most pressing concerns surrounding CBDCs is the level of privacy they would offer.Finding the right balance between preventing illicit activities and protecting individuals' financial privacy is paramount. Staff Working Paper No. 605 The macroeconomics of central bank issued digital currencies John Barrdear (1) and Michael Kumhof (2) Abstract We study the macroeconomic consequences of issuing central bank digital currency (CBDC) a universally accessible and interest-bearing central bank liability, implemented via distributed ledgersThe system must be designed to deter money laundering and other illegal activities while ensuring that users' transaction data is not unduly accessible or misused. The Terms of Reference and further details on the CBDC Taskforce, Technology Forum and Engagement Forum can be found on Digital Currencies. The Discussion Paper on Central Bank Digital Currency: opportunities, challenges and design, March 2025.A key challenge will be developing robust privacy safeguards that maintain public trust and confidence in the CBDC.

Cyber Security (Including Quantum Computing)

Given the digital nature of CBDCs, cyber security is a critical concern.The system must be resilient to cyberattacks and protected from unauthorized access.This includes addressing the potential threat posed by quantum computing, which could potentially break existing encryption methods.The Bank of England is actively researching and developing advanced security measures to safeguard the CBDC system and ensure its integrity.

Offline Functionality

Ensuring that a CBDC can function even when internet connectivity is unavailable is essential for financial inclusion and resilience.This would allow individuals in areas with limited internet access, or during times of network outages, to continue making payments and accessing their funds.Offline functionality presents significant technical challenges, but the Bank of England is exploring innovative solutions to overcome these hurdles.

Point of Sale Considerations

The design of the CBDC system must consider how it will integrate with existing point-of-sale systems used by businesses. This discussion paper outlines an illustrative platform model of central bank digital currency (CBDC) designed to enable households and businesses to make payments and store value.This includes ensuring compatibility with different payment methods and minimizing disruption to merchants.A seamless and user-friendly experience at the point of sale is crucial for the widespread adoption of a digital pound.

Scenarios and Potential Risks: Delving into the Working Paper

The Bank of England's staff working paper doesn’t just outline the potential benefits of a CBDC; it also thoroughly examines the potential risks and financial stability issues.The paper considers various scenarios related to the introduction and adoption of a digital pound, including:

Initial CBDC Introduction: The paper analyzes the sectoral balance sheet dynamics at the point when a CBDC is first introduced into the economy.This includes understanding how different sectors (e.g., banks, households, businesses) adjust their holdings of CBDC and other assets.
Large-Scale Run Out of Bank Deposits into CBDC: The paper also explores the potential consequences of a sudden and significant shift of funds from commercial bank deposits into CBDC.This scenario examines the impact on bank lending, financial stability, and the overall economy.

By modeling these scenarios, the Bank of England aims to identify potential vulnerabilities and develop appropriate policies to mitigate risks. Staff Working Paper No. 725 By Michael Kumhof and Clare Noone. This paper sets out three models of central bank digital currency (CBDC) that differ in the sectors that have access to CBDC. It studies sectoral balance sheet dynamics at the point of an initial CBDC introduction, and of an attempted large-scale run out of bank deposits into CBDC.This proactive approach is crucial for ensuring a smooth and stable transition to a digital currency ecosystem.

The Macroeconomic Implications of a CBDC

Beyond the immediate considerations of design and risk, the Bank of England is also studying the broader macroeconomic implications of issuing a CBDC. See full list on gov.ukThese implications can be far-reaching, affecting areas such as:

Monetary Policy: A CBDC could potentially enhance the effectiveness of monetary policy by allowing the central bank to directly influence interest rates and credit conditions. Central bank digital currencies are engendering concern. As understanding of CBDCs is very limited, further research is warranted which will focus not only on the economic rationale of CBDCs but also on how they will impact monetary policy transmission, financial and price stability, inflation targeting, unconventional monetary instruments, central banks as lenders of last resort, andFor example, the Bank could potentially pay interest on CBDC holdings, providing a more direct tool for managing inflation and stimulating economic growth.
Financial Stability: As mentioned earlier, a large-scale shift from bank deposits to CBDC could pose risks to financial stability. A Central Bank Digital Currency (CBDC) would be an electronic form of central bank money that could be used by households and businesses to make payments. The Bank has not yet made a decision on whether to introduce CBDC, and intends to engage widely with stakeholders on the benefits, risks and practicalities of doing so.However, a well-designed CBDC could also potentially enhance financial stability by providing a safer and more resilient payment system.
Innovation: A CBDC could foster innovation in the financial sector by providing a platform for new payment services and business models.This could lead to greater efficiency, lower costs, and increased competition in the financial industry.

Staff Working Paper No. 605, titled ""The Macroeconomics of Central Bank Issued Digital Currencies,"" delves into these issues, studying the macroeconomic consequences of issuing a universally accessible and interest-bearing central bank liability implemented via distributed ledgers. HM Treasury (HMT) and the Bank of England (the Bank) have today announced the next steps on the exploration of a UK Central Bank Digital Currency (CBDC). CBDC would be a new form of digital money issued by the Bank of England and for use by households and businesses for their everyday payments needs.Understanding these complex interactions is essential for making informed decisions about the future of money in the UK.

The Digital Pound: Not a Replacement for Cash

It's crucial to emphasize that the Bank of England is not considering a CBDC as a replacement for cash. A group of seven central banks (Bank of Canada, Bank of England, Bank of Japan, European Central Bank, Federal Reserve, Sveriges Riksbank and Swiss National Bank), together with the Bank for International Settlements, are working together to explore central bank digital currencies (CBDCs) for the public ( general purpose or retail'' CBDC).The intention is to offer a digital alternative that complements existing payment methods, providing consumers and businesses with more choice and flexibility.

Cash remains an important payment method for many people, particularly those who prefer its anonymity or who lack access to digital payment infrastructure. Bank of England: Central Bank Digital Currency: opportunities, challenges and design, March 2025. Bank of England: Summary of responses to the discussion paper Central Bank Digital Currency: opportunities, challenges and design, June 2025. Bank of England: Discussion paper: New forms of digital money, June 2025.The Bank of England is committed to ensuring that cash remains available and accessible to those who need it.

Therefore, a digital pound would coexist with cash, providing a broader range of payment options to suit different needs and preferences.

International Collaboration: A Global Perspective on CBDCs

The Bank of England is not alone in exploring the potential of CBDCs.Central banks around the world are actively researching and experimenting with digital currencies, driven by similar motivations such as declining cash usage, rising digital payments, and the desire to improve financial inclusion.

The Bank of England is actively collaborating with other central banks and international organizations, such as the Bank for International Settlements (BIS), to share knowledge and best practices on CBDC design and implementation. The Bank of England describes central bank digital currencies (CBDCs) as an electronic form of central bank money that could be widely used by households and businesses to make payments and store value .This international collaboration is essential for ensuring that CBDCs are interoperable and that potential risks are effectively managed on a global scale.

For instance, the BIS Innovation Hub’s Project Agora involves seven central banks, including the Bank of England, in an experiment to test exchanging tokenized commercial bank deposits and central bank money in multiple currencies on a single platform.This type of collaboration is crucial for exploring the potential of cross-border payments using CBDCs.

Addressing Concerns and Misconceptions

The concept of a CBDC can be complex, and it's important to address common concerns and misconceptions.Here are some key points to clarify:

Data Privacy: Concerns about government surveillance are understandable.The Bank of England is committed to designing a CBDC with robust privacy safeguards, balancing the need to prevent illicit activities with the protection of individuals' financial privacy.
Centralized Control: While a CBDC would be issued and controlled by the Bank of England, this does not necessarily mean centralized control over all financial transactions. The Bank of England (the BoE) recently issued a Discussion Paper on opportunities, challenges, and design of central bank digital currency (CBDC). The Paper seeks comments andThe system could be designed to allow for private sector innovation and competition in payment services.
Risk of Bank Disintermediation: There are concerns that a CBDC could lead to a decline in bank deposits, potentially impacting bank lending.The Bank of England is carefully considering these risks and exploring design options to mitigate them.
Cyber Security Threats: The Bank of England recognizes the importance of cyber security and is investing in advanced security measures to protect the CBDC system from attacks.

The Future of the Digital Pound: What's Next?

The Bank of England's exploration of a CBDC is an ongoing process.The recent working paper and related discussions are part of a broader effort to assess the potential benefits, risks, and practicalities of introducing a digital pound.The Bank will continue to engage with stakeholders, conduct further research, and experiment with different design options before making any final decisions.

In March 2025, the Bank of England published a Discussion Paper on Central Bank Digital Currency, outlining opportunities, challenges, and design considerations. (Arzu Uluc and Tomasz Wieladek), ECB Working Paper Series No. 2025; 2025. Monetary versus macroprudential policies: causal impacts of interest rates and credit controls in the era of the UK Radcliffe Report (D Aikman, O Bush and A M Taylor), NBER Working Paper No. ; CEPR Discussion Paper No. ; LSE Economic History Working Paper No. 246A summary of responses to this discussion paper was published in June 2025. Central bank digital currencies The Bank of England and HM Treasury have created a Joint Taskforce to explore the potential of a retail central bank digital currency (CBDC). A retail CBDC is different to privately issued cryptocurrencies such as Bitcoin. Instead, it would be a form of electronic money issued by the Bank of England thatThese documents provide valuable insights into the Bank's thinking and the feedback it has received from stakeholders.

The Terms of Reference and further details on the CBDC Taskforce, Technology Forum, and Engagement Forum can be found on the Bank of England's website.These resources provide a wealth of information about the Bank's CBDC exploration efforts.

Conclusion: A Deliberate and Collaborative Approach

The Bank of England's issuance of a working paper on Central Bank Digital Currencies signifies a significant step in exploring the potential of a digital pound for the UK.This move is driven by the evolving digital landscape and the need for innovative solutions to meet the changing needs of consumers and businesses.The Bank is taking a deliberate and collaborative approach, carefully considering the potential benefits, risks, and practicalities of a CBDC.

Key takeaways from the Bank of England's exploration include:

A CBDC would be an electronic form of central bank money, offering a digital alternative to cash.
The Bank is committed to robust privacy safeguards and ensuring financial stability.
International collaboration is essential for interoperability and risk management.
The Digital Pound is not intended to replace cash

The future of money is undoubtedly digital, and the Bank of England is actively shaping that future to ensure a secure, efficient, and inclusive financial system for all.Now is the time to stay informed and participate in the ongoing dialogue about the potential of a digital pound.Consider reviewing the Bank of England's published papers and engaging with relevant stakeholders to contribute to this important discussion.