The Bank of England has teamed up with five of the world’s largest central banks to investigate the economic benefits of a central bank digital currency (CBDC). 

Joining the Bank of England in the collective are the Bank of Canada; the Bank of Japan; the European Central Bank; the Sveriges Riksbank; the Swiss National Bank, and the Bank for International Settlements (BIS). If a CBDC is found to be workable, digital currencies could be at the helm of the planet's most influential institutions.

According to a press release, the central bank collective will "assess CBDC use cases; economic, functional and technical design choices, including cross-border interoperability; and the sharing of knowledge on emerging technologies."

The European Central Bank continues to investigate the idea of building its own digital currency. Image: Shutterstock.

The banking cooperative also plans to coordinate with global regulators, such as the financial stability board, as well as the committee on Payments and Market Infrastructures (CPMI).

Are central bank digital currencies inevitable?

The central banks’ drive to research CBDCs follows rapid innovations from the private sector around digital currencies—including Facebook's Libra project and, of course, the emergence of cryptocurrencies.

For Danny Scott, CEO of British Bitcoin exchange CoinCorner, it came as “no surprise” that the central banks are looking into the possibility of issuing their own digital currencies. “The announcement of Facebook’s Libra cryptocurrency last year highlighted the potential threat of a global digital currency in control of the wrong people,” he said. “It was only a matter of time before the banks took action."

Scott added that this isn't the first time the banking sector has explored blockchain technology in order to remain in control. “In 2014, we saw the creation of R3—a group of financial companies including big names like HSBC, J.P. Morgan [and] Bank of America—which looked at the potential uses of blockchain technology in the traditional banking industry."

Playing catch-up with China

This latest collaboration has sprung up amid a CBDC revolution, in which several central banks—including the People's Bank of China—are either considering a CBDC or actively piloting one. Unsurprisingly, the collective will be co-chaired by the head of the BIS Innovation Hub, Benoît Cœuré—a notable detractor of Facebook's Libra. Back in September, Cœuré described Facebook's foray into digital payments as a "wake-up call" for central banks—urging global institutions to unite and investigate CBDCs.

"The next natural step would be for global central banks to join forces and jointly investigate the feasibility of CBDCs based on common technical standards," he noted.

Indeed, Bradley Rice, senior associate at law firm Ashurst, said that the collective was likely responding to the aggregated threat of Libra and China's incipient CBDC. “I cannot see central banks giving up control of monetary policy,” Rice said. “But projects like Facebook's Libra and others currently in design might have called that into question. Add into the mix the power and growth of China as a world economy, the rise of other emerging economies, and the fight the US will put up to maintain the status of the dollar, then it makes perfect sense for the Bank to take this action. If it didn't it could become an existential question."

Dampening the dollar’s influence

Arguably, the main goal of the central bank collective is to future-proof; however, whether that means we'll see a "synthetic hegemonic currency” (SHC) any time soon remains to be seen.

The Governor of the Bank of England, Mark Carney, was among the first central bankers to suggest such a currency. In a speech back in August, Carney opined that a SHC might be the best way to "dampen the domineering influence of the US dollar on global trade.”

That might explain America’s notable absence from the CBDC working group, though some Congressmen and the former chairman of the Commodity Futures Exchange Commission are pushing the US to develop a digital dollar. 

CBDCs aside, Scott addresses a more significant issue—one of monetary control. According to the CoinCorner CEO, there's only one currency that will provide financial sovereignty—and it definitely won't be backed by a central bank.

"With trust in the financial sector fading, people are looking to the likes of Bitcoin as the future of money,” Scott said. “Bitcoin is successful as a global digital currency because its decentralised, something that a central bank-backed digital currency can’t be—the banks will still ultimately be in control of your money.”