Digital finance saw significant growth last year. At Accenture, we saw our digital exchange clients get their licenses to operate. We have been driving projects with leading central and commercial banks to re-architect the geography of wholesale central bank digital currency settlement and have been working with leading central banks to pilot retail CBDC from the Nordics to Eurasia. For the Digital Pound Foundation, we launched formally in October 2021 with an impressive group of foundation and associate members – including Accenture, AvaLabs, Billon, CGI, Electroneum, Ripple and Quant – alongside our originating members.
There were plenty of big developments in digital finance, spanning the full spectrum of digital assets and digital currencies and involving actors ranging from central banks to commercial banks, exchanges and other financial market infrastructures.
By the end of 2021, China’s digital yuan pilot had reached 18% of the population with 261m users, while most of the world’s central banks are now either researching, piloting or implementing their own central bank digital currency projects. As this new area unfolds and matures, commercial banks are also looking to issue or oversee digital assets and stablecoins.
Topics include the issue of wholesale versus retail, the merits of token versus account, public versus private ledgers, levels of privacy and anonymity, and if non-residents will be allowed to transact using domestic CBDC.
With change comes both challenges and opportunities. For those institutions that have built a business around the friction that these new developments are intended to overcome, there will be resistance. For those that will benefit from this change, it couldn’t come soon enough.
Innovation in new forms of digital money is not just about technology but also the potential strategic and economic impacts. Retail, wholesale and cross-border applications of new forms of digital money may transform financial markets.
In the UK, 2021 began with the Treasury launching its consultation on the UK regulatory approach to cryptoassets and stablecoins. The consultation sought to obtain respondents’ input on a range of questions related to the classification of digital assets, the application and potential extension of the regulatory perimeter and, specifically, the treatment of certain types of stablecoins, including those deemed to be of potentially systemic importance. The findings from this consultation have not yet been published, but many will be watching eagerly for the first indications from the Treasury as to how the UK’s regulatory regime might be extended and strengthened to accommodate specific characteristics of digital assets. This would represent the first significant advance on digital asset and stablecoin regulation since the Financial Conduct Authority’s guidance on cryptoassets in July 2019.
Following its 2020 document on retail CBDC, the Bank of England issued its discussion paper on new forms of digital money in June 2021. This new paper provided an insight into the Bank’s considerations with respect to the role of public and private forms of digital money, the potential prudential regulatory considerations with respect to the latter and the impact that both might have on the banking system, particularly as to the potential outflows of commercial bank money and the associated implications for credit creation. Sir Jon Cunliffe’s speech at OMFIF’s Digital Money Institute in May 2021 provided further context to the questions vexing UK policy-makers.
In April 2021, the Treasury and Bank of England announced the formation of their joint CBDC taskforce to coordinate the exploration of a UK CBDC. This was followed by the establishment of the Bank of England’s CBDC engagement and technology forums in September 2021, aimed at engaging a range of industry stakeholders to gather strategic input on policy considerations, functional requirements and technological aspects of CBDC.
Following its call for evidence on CBDC, the House of Lords economic affairs committee published ‘Central bank digital currencies: a solution in search of a problem?’ in January 2022. While appearing to pour lukewarm water on the concept of retail CBDC in particular, the report represents less a directive or even a recommendation to policy-makers and legislators and more the posing of a set of questions to be answered by the CBDC taskforce. Many of these are already either well within the scope of the taskforce or have been covered elsewhere in the Bank of England’s publications.
CBDC, digital money and digital asset projects, initiatives and businesses will take time to implement and grow. In 2022 we can expect less hype and more concrete intent to materialise value and benefit for pioneers. Environmental, social and governance topics will play an increasingly important role. Combining these topics may create an optimal mix, as pilots and live implementations and products gain momentum.
John Velissarios is Global Managing Director, Blockchain and Multiparty Systems, and Digital Assets, Custody and CBDC Lead at Accenture. Jannah Patchay is Originating Member, Digital Pound Foundation.