Bessie Liu

The Bank of England, along with the United Kingdom’s Treasury, is exploring the possibility of a digital currency that would purportedly maintain monetary stability in the UK’s economy.&nbsp;



In a joint <a href="https://www.bankofengland.co.uk/paper/2023/the-digital-pound-technology-working-paper" target="_blank" rel="noreferrer noopener">paper</a> on Tuesday, the Bank of England (BoE) and the government’s HM Treasury said a digital currency is likely needed in the future — adding that it’s still too early to commit to building infrastructure that would underpin it. 



Even so, an examination looking into how the currency could operate is in the works.&nbsp;



Jon Cunliffe, the deputy governor for financial stability for the BoE, said in a <a href="https://www.bankofengland.co.uk/speech/2023/february/jon-cunliffe-speech-at-uk-finance-update-on-central-bank-digital-currency" target="_blank" rel="noreferrer noopener">speech</a> that the consultation and development stage could take two to three years. The results of that process would inform the decision of whether to implement a digital pound. 



“The work … will reduce the lead time to launch should the decision at the end of this stage be to implement the digital pound in the UK, which could then be introduced in the second half of the decade,” Cunliffe said.



The British government will work closely on the development of a technical blueprint for the digital pound — and tap the private sector for research and development, he said.



<h3>Utilizing crypto tech</h3>



A future digital currency will not be similar to cryptoassets “such as bitcoin,” Cunliffe said in the same speech.&nbsp;



“The majority of cryptoassets are highly speculative assets, whose value is extremely volatile, because there is nothing behind them,” he said. “They have no intrinsic value. For that reason, they are not suitable and not used for general payment purposes.”



By contrast, he said that the digital pound would be a “safe, trusted form of money accepted for everyday transactions by households and firms, in the same way as Bank of England notes are today.”



Despite this, he does not dismiss the technology that has helped build cryptocurrencies and the role it could play in the development of the digital pound — especially with digital payment technology on the rise.&nbsp;



“There are already in existence new digital technologies that are being applied to the digital representation, transfer and storing of money like obligations,” he said. “Programmable money, for example, could enable the development of smart contracts which carry out specific actions based on predefined actions and conditions.”



<h3>What does the digital pound look like?</h3>



The digital pound would be designed to be used like a digital banknote for day to day payments — both in person and online — but would not replace cash outright.



Any issuance would incorporate public and private partnerships, the consultation paper said. UK’s Central Bank would provide the currency and central infrastructure, and private sector companies would look at ways to integrate it into their operations and interface — such as existing digital wallets.



“Users would interact with digital pounds by using their wallet to see their balance and instruct payments and transfers of digital pounds. It is likely most people would access the wallet via their smartphone, but there would be alternative options, such as a smart card,” the consultation paper said.



<h3>Global adoption of digital currencies</h3>



The UK is not the only country looking into adopting digital currencies.&nbsp;



According to the Atlantic Council’s CBDC <a href="https://www.atlanticcouncil.org/cbdctracker/" target="_blank" rel="noreferrer noopener">tracker,</a> 11 countries have already launched a digital currency, and 17 countries are already testing their own pilot version.



Notably, <a href="https://blockworks.co/news/china-debuts-digital-yuan-at-winter-olympics-amid-warnings-from-us-senator">China’s pilot of its digital yuan</a>, is on track to expand to the entire country this year.



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The Bank of England is Looking to Build a Digital Pound

Ben Strack

<div id="highlights-block_629fbd79dfa46" class="highlights">
 <ul>
 <li>Many central banks are realizing the importance of having “a central trusted form of digital money” alongside private stablecoins, according to Paul</li>
 <li>More than half of central banks are now developing CBDCs or running concrete experiments, according to the Bank for International Settlements</li>
 </ul>
 
</div>



The new director of CBDC and market infrastructure for crypto technology provider <a href="https://www.fireblocks.com" target="_blank" rel="noreferrer noopener">Fireblocks</a> just wrapped up a 14-year tenure with the Bank of England. Varun Paul, who most recently led the UK central bank’s fintech hub and future of finance initiatives, sat down with Blockworks to discuss his move to crypto and how central banks are thinking about stablecoins and CBDCs (central bank digital currencies).  



Paul said he began thinking about crypto in 2018 while he was leading the Bank of England’s review of financial stability risks from cryptoassets and how the financial ecosystem could change by 2030.



Nine of 10 central banks are exploring CBDCs, and more than half are now developing them or running concrete experiments, according to <a href="https://www.bis.org/publ/bppdf/bispap125.pdf" target="_blank" rel="noreferrer noopener">a survey published last month</a> by the Bank for International Settlements.



Nigeria launched its CBDC, called the eNaira, last October, and the Banque de France conducted CBDC pilots last year. Some other longer-standing central banks, such as the Federal Reserve in the US — which published a whitepaper on CBDCs in January — may take more time to get things running, Paul said.



Check out excerpts from Paul’s Q&amp;A with Blockworks below:



Strack: Why did you make the move from a central bank to a crypto firm?



Paul: For a long time, [the Bank of England] was asking this question about whether cryptoassets could be currency, if they met the economic definition of a currency and whether central banks believe that.



We said, in 2018, this doesn’t really function as what we would traditionally think of as a currency because of stability, transaction speed and the ability to hold it, but a lot of these things have changed.



The security and the technology at Fireblocks was the thing that made me make the leap. Having been on the skeptical side before, it was this innovation that made me think this is the time to come across.



I understand where the central bank comes from, and now I have the beauty of this outstanding technology to try and make, for example, central bank digital currencies and tokenized settlement of financial assets, a reality.



Previously one of the biggest risks for a central bank would have been how can we make sure this thing is stored safely, isn’t vulnerable to hacks and can be transferred securely as well. [Fireblocks] increases the trust and increases the speed, and those are very key things that I think were missing before.



Strack: How are central banks thinking about CBDCs?



Paul: Nearly every central bank in the world is experimenting or thinking about a central bank digital currency. The world has become clearly more digital in the last five years, and there’s been increasing pressure from the growth in appetite and interest in cryptoassets and stablecoins. 



They’re in a position where they’re saying we need to be realistic about the fact that there are, for example, huge inefficiencies in cross-border payments, and many of the benefits of cryptoassets and stablecoins could be used in the system.



But there’s another element here, which is there’s a world in which more and more of the financial system — in terms of retail payments, for example — moves into a private form of money within cryptoassets and stablecoins, where it’s no longer part of the central bank’s control of money supply. 



A lot of the central banks will say there’s a reason we’ve been entrusted with creating banknotes and ensuring the stability and the credibility of that money. And so they will see themselves as having a role to play in the provision of a digital form of money that is trusted and that has the credibility of the central bank behind it.



Strack: Can CBDCs and private stablecoins co-exist?



Paul: I don’t think that any [central banks] will feel the need to suddenly say no other money should exist. Other monies, private monies have existed for centuries. But they will likely feel that a central trusted form of digital money is important if there are going to be private forms of digital money out there.



I think the central bank digital currency role in the future will be as this centerpiece to a wider ecosystem of stablecoins for certain things, other cryptoassets for other transactions and a network of central bank digital currencies, which will underpin the value of, for example, those stablecoins in that future ecosystem.



Strack: How might the collapse of Terra’s stablecoin have impacted the way central banks think about this space?



Paul: In a world where different stablecoins and different models are being tried out, you should expect some failures. I think a lot of people will be able to look through this if they’re thinking with a long enough horizon.



CBDCs aren’t immediate — they’re not going to happen next week, they’re a few years away potentially. They will be able to look through that and say we’ve learned something here about the market. We should go in with our eyes open, is probably what they’re thinking, and they will continue to progress with caution.&nbsp;



But I think they will as a result continue to look carefully at the models that work for them and will want to be careful about exactly what kind of CBDC they devise on the back of that. It’s a learning [experience] for everyone of what may or may not work in the future.



Strack: What countries or regions have you had your eye on?



Paul: I think one of the most exciting innovations that we’ve seen…is the issuance of stablecoins [by banks] in Australia and New Zealand. So there you have an example of traditional financial institutions really getting to the heart of the innovation and driving it forward.



So that’s an example where the regulator and central bank can encourage the private financial institutions to adopt, and if they can harness that innovation, they can continue to drive forward further integration toward a central bank digital currency in the future.



Strack: Do you expect the US to develop a CBDC? If so, when?



Paul: The Fed has obviously put out their <a href="https://www.federalreserve.gov/publications/files/money-and-payments-20220120.pdf" target="_blank" rel="noreferrer noopener">discussion paper</a>, and it set out a few questions, but it’s clear that the US is early in its thinking. They’re obviously busy developing <a href="https://www.frbservices.org/financial-services/fednow/about.html" target="_blank" rel="noreferrer noopener">FedNow</a> to move US payments forward a generation. So in a sense you can imagine that a CBDC will come after that, and it’ll be the next evolution.&nbsp;



But there is a world in which US regulators say we need to get on the front foot on stablecoins and set the rules for how stablecoins should work and be clear about what stablecoins are and what they are not. In doing so, they also set a roadmap of what a central bank digital currency needs to do to support that ecosystem.



I get the sense that in the US the Fed is a couple of steps behind some of the other central banks…but they will have the tools and the thinking to develop that more rapidly if they wanted to.



Strack: How could CBDCs and stablecoins impact institutional crypto adoption more broadly?



Paul: There’s increased appetite from institutions, and we at Fireblocks are seeing that enormously at the moment. Institutions are willing to hold cryptoassets in their native form, and they want to engage with us because they want to have their own way to safely secure those assets and transfer them.



In addition, though, they’re still looking for clarity from the regulator. As an example of that, the kind of message sent by a central bank to say we’re happy with this technology, and we’re happy that there is a form of CBDC to move forward with, I think will accelerate adoption.



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Q&A: Bank of England Vet Says CBDCs Will Be a “Centerpiece to a Wider Ecosystem of Stablecoins”

<div id="highlights-block_629a39dde9916" class="highlights">
 <ul>
 <li>Bitget adds managing director to help connect centralized and decentralized finance</li>
 <li>Fidelity Digital Assets looks to up hiring, while Coinbase expects to slow additions</li>
 </ul>
 
</div>



Crypto technology provider Fireblocks hired a former Bank of England executive as its new CBDC and market infrastructure director.



Varun Paul, who will serve on Fireblocks’ corporate strategy team, was at the Bank of England for 14 years and ultimately led its fintech hub and future of finance initiatives.



&#8220;From CBDC [central bank digital currency] developments to the tokenization of traditional financial assets, bridging digital assets and blockchain technologies to traditional institutions at scale will require strong working relationships with the central bank community,” Fireblocks Head of Corporate Strategy Adam Levine said in a statement.&nbsp;



Derivatives exchange Bitget appointed Gracy Chen as a managing director. She previously held executive roles at XRSPACE, a virtual reality technology company headquartered in Taipei.&nbsp;&nbsp;



Bitget reported its all-time high derivatives trading volume of $8.7 billion earlier this year — a 300% increase from the year before.



Chen noted in a statement that she is an “avid investor” in crypto and seeks to help Bitget connect centralized and decentralized finance, “resulting in an expansive bridge to the vast web of crypto.”



Digital Entertainment Asset (DEA), a blockchain gaming and entertainment company based in Singapore, named Tatsuya Kohrogi as its head of global business.



Known for its gaming and decentralized finance (GameFi) platform PlayMining, which allows players to mine crypto while they play games, DEA has 2.4 million players worldwide. The company was founded in 2018 and is developing play-to-earn game JobTribes and an NFT marketplace.



Kohrogi served as a partner manager at Meta (formerly Facebook), where he worked with ad agencies in Japan. Prior to Meta, he was at SoftBank, where he held investment strategy, business development, sales management and digital marketing roles during his seven years at the company.



“As we begin to expand our business across Asia, Europe and North America, we are confident each region will grow under Tatsuya&#8217;s leadership,&#8221; DEA CEO Naohito Yoshida said in a statement.



In case you missed it, Fidelity Investments’ digital asset arm said it is <a href="https://cms.blockworks.co/fidelity-digital-assets-to-double-headcount/" target="_blank" rel="noreferrer noopener">seeking to double its headcount</a> by the end of the year as it pushes to expand its support for assets other than bitcoin. The expansion would include hiring about 210 workers across client services, custody operations, execution services and technology building roles, a spokesperson told Blockworks earlier this week.&nbsp;&nbsp;



Others are slowing down hiring amid the crypto market downturn.&nbsp;



Coinbase Chief People Officer L.J. Brock wrote in a <a href="https://blog.coinbase.com/update-on-hiring-plans-bcedfa634989" target="_blank" rel="noreferrer noopener">company post</a> that the exchange has decided to take more “stringent measures” to <a href="https://cms.blockworks.co/coinbase-latest-crypto-firm-to-cut-costs-amid-market-downturn/" target="_blank" rel="noreferrer noopener">slow its headcount growth</a> in hopes of navigating uncertain waters.



Gemini founders Tyler and Cameron Winklevoss said in a Tuesday memo to employees that the company <a href="https://cms.blockworks.co/gemini-joins-growing-list-of-crypto-exchanges-cutting-staff-amid-downturn/" target="_blank" rel="noreferrer noopener">expects to cut 10% of its staff</a> due to the ongoing crypto downturn, as well as macroeconomic and geopolitical factors.



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Latest in Hiring: Ex-Bank of England Exec Jumps Into Crypto

<div id="highlights-block_62963efb53490" class="highlights">
 <ul>
 <li>Proposal will give the Bank of England greater regulatory oversight over stablecoin issuers</li>
 <li>Stablecoins are not yet an accepted form of payment in the UK, although proposals to legalize cryptocurrencies are in motion</li>
 </ul>
 
</div>



UK regulators are concerned about the risks stablecoins pose to the wider financial system after the collapse of <a href="https://cms.blockworks.co/?s=terra" target="_blank" rel="noreferrer noopener">TerraUSD</a>, an algorithmic stablecoin that lost its 1:1 peg to the US dollar earlier this month, plummeting to less than ten cents in under 24 hours.



“Since the initial commitment to regulate certain types of stablecoins, events in cryptoasset markets have further highlighted the need for appropriate regulation to help mitigate consumer, market integrity and financial stability risks,” the government said in a <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1079348/Stablecoin_FMISAR_Consultation.pdf" target="_blank" rel="noreferrer noopener">consultation paper</a> Tuesday.&nbsp;



The three-part paper suggests that the government will use existing regulations to ensure the Financial Conduct Authority (FCA) will have the ability to regulate electronic money and payments to protect consumers from payment firm insolvency.



It is also proposed that the Bank of England should be given regulatory oversight over any &#8220;systemically important&#8221; payment systems. “A payment system may be designated as systemic where deficiencies in its design or disruption to its operation may threaten the stability of the UK financial system or have significant consequences for businesses or other interests.”



In the case of Terra’s UST, it is uncertain whether any regulatory regime could have prevented its downfall, as it was a global and decentralized experiment in creating a stablecoin unbacked by either stable reserve assets or overcollateralization. All prior attempts to create a stablecoin maintained solely <a href="https://cms.blockworks.co/?s=algorithmic" target="_blank" rel="noreferrer noopener">by algorithmic issuance</a> and arbitrage incentives have failed.



Stablecoins are not yet an accepted form of payment in the UK, although <a href="https://www.telegraph.co.uk/business/2022/05/14/rishi-sunak-legalise-stablecoins-despite-cryptocurrency-crash/" target="_blank" rel="noreferrer noopener">proposals</a> to legalize cryptocurrencies are in motion. Regulations around decentralized stablecoins will likely continue to pose a challenge to lawmakers.



The Treasury&#8217;s call for responses will close on August 2.&nbsp;



UK regulators are not the only ones to address the concerns around the collapse of Terra. US Consumer Financial Protection Bureau Director Rohit Chopra <a href="https://www.bloomberg.com/news/articles/2022-05-16/stablecoins-not-ready-for-consumer-payments-us-watchdog-says?sref=3REHEaVI" target="_blank" rel="noreferrer noopener">told Bloomberg</a> that the collapse of Terra illustrates that stablecoins may never be a substitute for the dollar. EU lawmakers are also looking to take <a href="https://www.europarl.europa.eu/RegData/etudes/BRIE/2021/698803/EPRS_BRI(2021)698803_EN.pdf" target="_blank" rel="noreferrer noopener">bespoke legislative measures</a>.



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Terra Collapse Sparks Stablecoin Regulation in the UK

Casey Wagner

<div id="highlights-block_6261be7bb93fd" class="highlights">
 <ul>
 <li>The BOE is increasing its regualtory budget this year to combat what the bank considers growing risks from emerging technologies</li>
 <li>Banks, insurance companies and related financial entities will have to fork over 9% more than last year</li>
 </ul>
 
</div>



Thanks to crypto, the Bank of England’s regulatory arm says it needs additional funding this year to cover the rising costs of its watchdog responsibilities.&nbsp;



The Prudential Regulation Authority (PRA) plans to raise 321 million pounds ($419 million) by February 2023, a 9% increase from last year, to combat growing risks around cryptocurrencies and other emerging technologies, the <a href="https://www.bankofengland.co.uk/prudential-regulation/publication/2022/april/pra-business-plan-2022-23'" target="_blank" rel="noreferrer noopener">regulator said</a> in its annual business plan Wednesday. 



The agency said operational costs have increased since the United Kingdom&#8217;s exit from the European Union, adding that the regulator hopes to add 100 employees with digital assets know-how.&nbsp;



The budget comes as UK regulators — like their American peers — play catch-up on crypto regulations. The country’s treasury recently made headlines when it asked the Royal Mint, the agency responsible for creating British currency, <a href="https://cms.blockworks.co/uk-treasury-asks-government-coin-issuer-to-mint-nft/" target="_blank" rel="noreferrer noopener">to mint an NFT</a>.



The <a href="https://cms.blockworks.co/uk-aims-to-let-consumers-use-stablecoin-services-with-confidence/" target="_blank" rel="noreferrer noopener">finance ministry</a> earlier this month moved to prioritize regulating stablecoins that are used for payments. The PRA plans to use a slice of its regulatory budget for that purpose.



“Work will also continue in developing a regulatory framework that is ready for technological innovations, such as stablecoins,” the PRA said in a statement.



The funds will be collected from regulated firms, including banks, building societies and insurers. In the 12 months ending in February, the PRA secured 297 million pounds ($386 million) from such entities.



Regulated firms pay different amounts, depending on size and activity. The fee structure is designed so the firms that could potentially cause the greatest harm to the financial system pay more, the PRA said.



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Bank of England Says Crypto Has Busted Its Budget in $419M Shortfall

Macauley Peterson

<div id="highlights-block_61bb6de2d796b" class="highlights">
 <ul>
 <li>The Bank of England raised interest rate by 15 basis points to 0.25%, in a near unanimous vote</li>
 <li>The European Central Bank leaves rates unchanged, but will taper its government bond purchases</li>
 </ul>
 
</div>



The Bank of England’s monetary policy committee (MPC), decided on Thursday to raise its Bank Rate to 0.25%, according to <a href="https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2021/december-2021" target="_blank" rel="noreferrer noopener">the committee’s minutes</a>, in a bid to dampen inflation. The 12-month CPI rate jumped from 5.1% in November, up from 3.1% in September, and the highest level since September 2011. The Committee voted by an eight to one margin in favor of the rate hike.



The move comes a day after the US Federal Reserve’s analogous group left rates unchanged but also <a href="https://cms.blockworks.co/fed-gets-hawkish-doubles-taper-signals-three-rate-hikes-in-2022/" target="_blank" rel="noreferrer noopener">moved to tighten monetary policy</a> by decelerating its asset purchase program more quickly than earlier planned.



Like the Fed, the Bank of England (BoE) policymakers expect that upward pressure on CPI inflation is driven primarily by supply disruption and should dissipate over time, returning closer to the committee’s long-term 2% target rate.



The MPC notes that the Omicron Covid-19 variant is spreading rapidly in the UK, but it’s medium-term economic effects remain unclear, while inflation has risen faster than anticipated.&nbsp;



The International Monetary Fund (IMF) UK staff weighed in with <a href="https://www.imf.org/en/News/Articles/2021/12/14/united-kingdom-staff-concluding-statement-of-the-2021-article-iv-mission" target="_blank" rel="noreferrer noopener">a policy statement</a>, Tuesday, targeted squarely at the BoE, warning against “inaction bias, in view of costs associated with containing second-round impacts.”



Unemployment in the UK is expected to be 4% in November, down 0.5%, indicating the labor market remains tight.



<h3>ECB calls for “flexibility”</h3>



In the Eurozone, inflation surged to 4.9% in November, the highest level ever recorded, <a href="https://ec.europa.eu/eurostat/documents/2995521/11563387/2-30112021-AP-EN.pdf" target="_blank" rel="noreferrer noopener">according to Eurostat</a>.



At Thursday’s <a href="https://www.ecb.europa.eu/press/pressconf/2021/html/ecb.is211216~9abaace28e.en.html" target="_blank" rel="noreferrer noopener">European Central Bank (ECB) policy meeting</a> in Frankfurt, Germany, ECB President Christine Lagarde announced a scaling back of asset purchases under the pandemic emergency purchase program (PEPP), and its full discontinuance in March 2022.



<blockquote class="wp-block-quote">“We judge that the progress on economic recovery and towards our medium-term inflation target permits a step-by-step reduction in the pace of our asset purchases over the coming quarters. But monetary accommodation is still needed for inflation to stabilise at our two per cent inflation target over the medium term,” Lagarde said in her prepared remarks.</blockquote>



<hr class="wp-block-separator"/>



<div align="center"><iframe loading="lazy" width="560" height="315" src="https://www.youtube.com/embed/Ra6S1O6ZMb0?start=346" title="YouTube video player" frameborder="0" allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture" allowfullscreen=""></iframe></div>



<hr class="wp-block-separator"/>



The key ECB interest rates were left unchanged. Similar to the Fed’s policy, the ECB plans to wind down net asset purchases prior to raising rates.



Eurozone inflation is expected to remain elevated next year, but to decline over the course of the year, mirroring the outlook in both the UK and the US.



The US dollar weakened following the BoE and ECB announcements. The DXY, an index representing the USD against a basket of major foreign currencies, fell almost 0.5% in the two hours following the policy updates, but recovered by midday in New York.




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