Central bank digital currencies: a solution in search of a problem? Contents

Chapter 4: International implications


97.The US dollar dominates the international monetary system. A significant amount of cross-border trade is transacted in dollars, which makes it the world’s main invoicing currency. It is the leading payments currency and the principal reserve currency. Around 60% of foreign exchange reserves held by the world’s central banks are in dollar-dominated assets.134

98.We heard that global reliance on the dollar and US payment systems enhances the US’s ability to implement sanctions. This is because cross-border payments depend on two pieces of critical infrastructure: SWIFT and a network of correspondent banking agreements.135 SWIFT is a Belgian-based messaging platform that facilitates cross-border payments between financial institutions. While SWIFT claims political neutrality, the US has used its economic power to influence it in pursuit of foreign policy goals. For example, the US government persuaded SWIFT to block transactions with Iran.136 Furthermore, it threatened to exclude Russian banks from SWIFT after the invasion of Crimea in 2014.137 The threat of losing access to SWIFT is powerful as it effectively severs contact with the international financial system.

99.Many countries are seeking to reduce their reliance on SWIFT,138 including US allies. In January 2019, Germany, France and the UK established the Instrument in Support of Trade Exchanges (INSTEX) to maintain their commitment to the Iran nuclear deal (the Joint Comprehensive Plan of Action) after the US government withdrew from the agreement. INSTEX bypasses cross-border payments through a mechanism which enables European and Iranian firms to barter with each other indirectly.139 China and Russia are also developing new cross-border payments and messaging services.140 Tom Keatinge, Director for the Centre for Financial Crime and Security Studies at the Royal United Services Institute (RUSI), told us that if countries can trade without needing to “touch the US dollar … we shall see a deterioration and disintegration of some of the norms that have held together international security in past decades.”141

100.Some countries have said that avoiding US sanctions or reducing their reliance on the US dollar is a motive behind developing CBDCs. Russia’s central bank was reported to have said that a digital rouble could help mitigate the risk of sanctions. Iran’s central bank has developed a prototype of a digital rial.142 In April 2020 Chinese state media said:

“A sovereign digital currency provides a functional alternative to the dollar settlement system and blunts the impact of any sanctions or threats of exclusion both at a country and company level. It may also facilitate integration into globally traded currency markets with a reduced risk of politically inspired disruption.”143

101.The People’s Bank of China has said that its E-CNY CBDC will be restricted to payments within China. However, there is scope for this to change. On 16 July 2021, it published a progress report of a working group on E-CNY which said:

“though technically ready for cross-border use, e-CNY is still designed mainly for domestic retail payments at present. Looking ahead, the [People’s Bank of China] will actively respond to initiatives of G20 and other international organisations on improving cross-border payments and explore the applicability of CBDC in cross-border scenarios.”144

102.As outlined in Chapter 2, we heard that interoperable cross-border CDBC payments are improbable in the short term.145 In the long-term, the Atlantic Council said the absence of American-led innovation with interoperable CBDC mechanisms for cross-border trade could “begin to erode the dollar’s hegemony and replace the use of SWIFT, thereby reducing US sanctions leverage.” It said, “similar effects could occur for currencies like the pound and euro if relevant authorities fail to innovate.”146 Tom Keatinge warned of a world in which states might have to choose between payments systems dominated by either the US or China—whether “you want to be part of the Chinese walled garden or part of the United States walled garden”.147

103.John Glen MP, the Economic Secretary to the Treasury, told us that “it is difficult to come to a clear conclusion” on how CBDC might affect the efficacy of sanctions. The current sanctions policy, operated primarily through SWIFT, “is a powerful tool” that has significant reach, but it was difficult to anticipate what might be the effect of CBDCs on the international payments system.148

104.In the short term, barriers to creating interoperable cross-border CBDCs are formidable. While a growing number of central banks are investigating this possibility, complex agreements on standards, design and governance would have to be agreed by all countries concerned. However, agreements between small groups of countries could be negotiated more quickly and it is clear there is political will in certain countries, including China, to create alternatives to the established international payments system, including through interoperable, cross-border CBDCs.

105.While this may be a distant prospect, if such payments architecture is implemented effectively, the pressure on the US dollar as a payment currency will increase. This trend could erode the US dollar’s sanctions leverage, helping countries seeking to evade economic sanctions to bypass US dollar-dominated systems such as SWIFT. We recommend that HM Treasury’s Office of Financial Sanctions Implementation assesses whether similar risks exist for sterling and the euro. It should also assess the development of CBDCs by countries which are a threat to UK security and any implications for the effectiveness of economic sanctions.


106.The Bank of England’s March 2020 Discussion Paper noted that a CBDC payments system would make an “attractive target for hackers or fraudsters who wish to steal funds” and it “may become a target for hostile attacks with the aim of disrupting the system and, potentially, the wider economy. For these reasons, the security of the CBDC payments system must be of the highest standard.”149 In December 2021, Sir Jeremy Fleming, Director of GCHQ, said that while a digital currency presents a “great opportunity” to democratise payment systems, it could also present a threat: “If wrongly implemented, it gives a hostile state the ability to surveil transactions. It gives them the ability … to be able to exercise control over what is conducted on those digital currencies.”150

107.Tom Keatinge told us that an online system would be a target for attack by foreign nation states: “North Korea has made extensive use of the fact that cryptocurrency exchanges and so on can be hacked. It ran a nearly very successful attack against the Bangladesh central bank a few years ago.”151

108.Stephen Bonner, Executive Director of Regulatory Futures and Innovation at the Information Commissioner’s Office, told us, “it is very hard to build a system that is perfect for ever.”152 EY, a consultancy, said the Bank would need to be “at the forefront of technology” to maintain the security of a CBDC system as technology failure or cyber-attack would give rise to “country-wide systemic risk.”153 SICPA, a consultancy providing security solutions and services, said that no solution can guarantee absolute security, “especially as we begin transitioning to the age of quantum computing.” It said any design would need to be adaptable to meet evolving security threats.154

109.Andrew Bailey, the Governor of the Bank of England, said design principles for security would be developed after any decision to proceed with a CBDC. He noted examples of cyber-attacks on private crypto assets and said a balance would need to be struck between security and usability.155

110.John Glen MP, the Economic Secretary to the Treasury, told us that operational resilience, data security and cybersecurity will be core to the evolution of any CBDC that the Government pursues, should it decide to. The financial authorities already “work closely with the intelligence agencies, the National Cyber Security Centre and law enforcement”, and “conversations” about security and CBDC designs would continue to be “front and centre”.156 Charles Roxburgh, Second Permanent Secretary at HM Treasury, told us that the Treasury is working closely with the security services on any implications of a CBDC for security.157

111.There are two clear security risks for a CBDC system. The first is that individual accounts, managed by the private sector, could be compromised as a result of cyber security weaknesses. The second is that a CBDC system, as a piece of critical national infrastructure, would be a target for attack from nation state or criminal actors. Such attacks would risk the exposure of sensitive payments data and the loss of national wealth. No design will guarantee absolute security. Any CBDC would need to be designed so that it was adaptable and could be updated rapidly in response to technological change and emerging security threats.

International standards

112.The Bank of England has been working with international partners to examine CBDC standards and design principles. During its 2021 G7 presidency, the Government led on issuing a joint statement on CBDCs and 13 public policy principles to shape global standards. Witnesses said that the UK is well placed to lead on developing international standards further and that there was a risk that the UK would be disadvantaged economically if it does not stay engaged in such work.158

113.The Atlantic Council said that the UK “playing a leading role in international standard-setting, will be crucial to secure London’s vitality to the global financial infrastructure and maintain its supremacy in transaction settlement and clearing.” Without global standards in governance and greater international coordination, “the financial system may be headed for a significant currency interoperability problem in the near future.”159

114.Tom Keatinge said that many countries are experimenting with CBDCs in isolation, and the UK could use its reputation as a leading financial centre to support the agreement of common standards. He said such work could contribute to avoiding ‘balkanisation’ of the international payments system.160

115.Sir Jon Cunliffe said because the majority of central banks are considering introducing CBDCs around the same time, there is an opportunity to design a new international payments system with “common standards and common legal approaches that would increase the ability for interoperability.” He said these decisions would not be made in international fora such as the Bank for International Settlements or the United Nations: “In the end, these decisions are taken by domestic central banks, domestic governments and domestic legislatures.”161

116.While other countries are developing and testing CBDC technology faster than the UK, the Government should prioritise opportunities to collaborate with its international partners in order to shape the emerging CBDC systems. The UK would derive most long-term benefit by ensuring global standards and rules on governance, privacy, security and interoperability are compatible with the national interests and values of the UK and its allies.

Wholesale CBDCs

117.Wholesale CBDCs (unlike universally available retail CBDCs) would be used only in transactions between financial institutions. They are intended for the settlement of interbank transfers and related wholesale transactions. The Bank for International Settlements said they serve the same purpose as reserves held at a central bank but with additional functionality:

“One example is the conditionality of payments, whereby a payment only settles if certain conditions are met. This could encompass a broad variety of conditional payment instructions, going far beyond today’s delivery versus-payment mechanism in real-time gross settlement (RTGS) systems. In effect, wholesale CBDCs could make central bank money programmable, to support automation and mitigate risks.”162

118.The Digital Pound Foundation, an advocacy group for digital money, said a programmable CBDC could deliver a range of benefits in the wholesale and capital markets, including automating payments in the life cycle of financial instruments (for example, dividends, subscriptions and coupon payments) and automating regulatory reporting requirements, among others.163

119.The Atlantic Council said wholesale CBDCs present an opportunity for countries to build cross-border ‘mCBDC’ (multi-CBDC) mechanisms that lower transaction costs for currency transactions and international capital movements: “leaders in wholesale CBDCs and in the development of cross-border mechanisms will be well-positioned to strengthen the role of their currency in the global economy and to cement their status as a financial centre.”164

120.The Aurora Project, a network of financial experts, said that other countries, particularly France, saw national strategic advantages in developing a CBDC for wholesale payments. It said that unless the UK accelerates the development of a wholesale CBDC, the City of London will be targeted by other financial centres with wholesale CBDCs in place.165

121.On 19 October 2021, it was reported that a consortium of France’s biggest financial market participants used a digital currency issued by the Banque de France as part of a CBDC pilot focused on France’s debt market. The trial was led by Euroclear, a securities depository, and included many of France’s largest banks, as well as the French public debt office and the central bank. It was part of a pilot commissioned in 2020 by the Banque de France to explore how CBDCs would exchange and settle, with transactions recorded on a digital ledger.166

122.Some witnesses said that prioritising a wholesale CBDC would have advantages. UK Finance said, “It may be that an initial pilot of a CBDC for wholesale use cases could provide the opportunity for the industry and regulators to test and learn ahead of a retail roll out.”167 David Birch, an adviser and commentator on digital financial services, said that what makes the City of London attractive is the cost of doing business, and “a significant way to reduce the cost of financial intermediation is through the use of wholesale digital currencies, which allow people to exchange financial instruments without the clearing and settlement risks associated with it.”168 He said the Bank of England and the private sector had already started work in this area.169

123.John Glen MP told us that he is confident that the Bank of England’s ongoing work to improve the RTGS wholesale system is “moving forward in the right direction.” He said he did not think the UK would gain any significant competitive advantage by being an early adopter of a wholesale CBDC.170

124.Sir Jon Cunliffe said it was not quite right to say the Bank was not examining CBDC technology for wholesale purposes: “The Bank published a paper on omnibus accounts, which would enable the banks that currently have access to central bank digital wholesale to use a digital coin between themselves and then the omnibus account would settle with the Bank of England.”171

125.A wholesale CBDC would be less disruptive than a retail CBDC, with fewer economic and political risks. Although the wholesale operations of the monetary system are already highly efficient, a CBDC may help to further enhance efficiency in securities trading and settlement. Further exploration and experimentation are necessary. HM Treasury and the Bank of England should assess whether the work on wholesale CBDCs being undertaken by some of the UK’s economic competitors poses risks to UK competitiveness. We recommend the Joint Taskforce consults on the use case for a wholesale CBDC alongside its 2022 retail CBDC consultation.

134 Eswar Prasad, The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance, (Harvard University Press, 2001)

135 Written evidence from SICPA (CDC0018)

136 Eswar Prasad, The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance, (Harvard University Press, 2001)

137 European Council on Foreign Relations, Ellie Geranmayeh and Manuel Lafont Rapnouil, Meeting the challenge of secondary sanctions, (25 June 2019): https://ecfr.eu/publication/meeting_the_challenge_of_secondary_sanctions/ [accessed 15 December 2021]

138 Written evidence from SICPA (CDC0018)

139 Eswar Prasad, The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance, (Harvard University Press, 2001)

140 Written evidence from SICPA (CDC0018)

141 Q 51 (Tom Keatinge)

142 Central Bank of the Islamic Republic of Iran, ‘The Central Bank of Iran delves into Digital Rial’, (15 May 2021): https://www.cbi.ir/showitem/21652.aspx [accessed 15 December 2021]

143 Daryl Guppy, ‘The future of China’s economic engagement’, China Daily (24 April 2020): https://www.chinadaily.com.cn/a/202004/24/WS5ea28240a310a8b2411516bf.html [accessed 15 December 2021]. See also, RUSI, The Other Side of the Digital Coin: Central Bank Digital Currencies and Sanctions, (26 May 2021): https://rusi.org/explore-our-research/publications/commentary/other-side-digital-coin-central-bank-digital-currencies-and-sanctions [accessed 15 December 2021].

144 People’s Bank of China, Progress of Research & Development of E-CNY in China (16 July 2021): http://www.pbc.gov.cn/en/3688110/3688172/4157443/4293696/2021071614584691871.pdf [accessed 15 December 2021]

145 Written evidence from Barry Eichengreen (CDC0036)

146 Written evidence from the Atlantic Council GeoEconomics Center (CDC0041)

147 Q 51 (Tom Keatinge)

148 Q 87 (John Glen MP)

149 Bank of England, Central Bank Digital Currency: opportunities, challenges and design (12 March 2020), p 46: https://www.bankofengland.co.uk/-/media/boe/files/paper/2020/central-bank-digital-currency-opportunities-challenges-and-design.pdf [accessed 15 December 2021]

150 ‘UK spy chief raises fears over China’s digital renminbi’, Financial Times (11 December 2021): https://www.ft.com/content/128d7139–15d6-4f4d-a247-fc9228a53ebd [accessed 15 December 2021]

151 Q 49 (Tom Keatinge)

152 Q 23 (Stephen Bonner)

153 Written evidence from EY (CDC0038)

154 Written evidence from SICPA (CDC0018)

155 Q 104 (Andrew Bailey)

156 Q 88 (John Glen MP)

157 Q 86 (Charles Roxburgh)

158 Q 49 (Tom Keatinge) and Q 25 (Stephen Bonner)

159 Written evidence from the Atlantic Council GeoEconomics Center (CDC0041)

160 Q 51 (Tom Keatinge)

161 Q 102 (Sir Jon Cunliffe)

162 Bank for International Settlements, Annual Economic Report (23 June 2021): https://www.bis.org/publ/arpdf/ar2021e3.htm [accessed 15 December 2021]

163 Written evidence from the Digital Pound Foundation (CDC0033)

164 Written evidence from the Atlantic Council GeoEconomics Center (CDC0041)

165 Written evidence from the Aurora Project (CDC0007)

167 Written evidence from UK Finance (CDC0021)

168 Q 36 (David Birch)

169 Q 37 (David Birch)

170 Q 83 (John Glen MP)

171 Q 98 (Sir Jon Cunliffe)

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