On May 18, the Bank of England issued a working paper outlining three different central bank digital currency (CBDC) models it is exploring.
The first is called the Financial Institutions Access Model. In this model, banks and nonbanking financial institutions (NBFIs), such as insurers and check-cashing businesses, will have access to bank accounts at the central bank. This will allow them to buy, sell, lend, and trade in the CBDC with the central bank in exchange for qualified assets, including banknotes. One of the benefits of this model identified in the paper is that it gives banks and NBFIs an alternative (and potentially more convenient) way to pay one another.
The second model, called the Financial Institutions Plus CBDC-Backed Narrow Bank Access Model, is very similar to the first in that only banks and NBFIs will have access to the CBDC. The difference is that under this model a NBFI will allow customers to use banknotes to buy and sell "indirect central bank digital currency" (iCBDC), which, according to the paper, may or may not function the same way as a CBDC. The benefits of this model are similar to the first except that banks may have less control over how they present iCBDCs to their customers.
The third model is called the Economy-Wide Access Model. As the name suggests, under this model everyone that participates in the economy – from individual consumers to large commercial banks – would have access to CBDC accounts at the central bank. However, only banks, NBFIs, and CBDC exchanges would be allowed to trade CBDC directly with the central bank. Households and businesses, meanwhile, would be required to use a CBDC exchange in order to convert CBDC to fiat money and vice versa. The exchange could be a standalone institution or run by a bank or NBFI. According to the paper, one of the main benefits of this model is that "Total Credit and Total Liquidity are never directly affected by the switch from bank deposits to CBDC, and may in fact … increase … the introduction of CBDC."
This paper is the next step in the adoption of a CBDC by the Bank of England. In 2015, it released its research agenda, in which it first explored the possibility of issuing a CBDC. More recently, it has narrowed its focus, publishing research questions on how issuing a CBDC could affect the economy and banking industry.
The Bank of England is not the only bank looking into the possibility of issuing a CBDC. Earlier this month ETHnews reported on a Bank of Korea taskforce researching a CBDC, as well as on a study being conducted by Norway's central bank.