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UK update: CBDCs, tokenized bank deposits, and self-sovereign identity systems in play

As nations worldwide move at a breakneck speed to make sure they keep pace with innovations related to digital currencies, blockchains, and financial innovation in general, things are moving quickly in the United Kingdom with several pieces of news in the past week.

BoE Governor encourages tokenized bank deposits

On Monday, Bank of England (BoE) Governor Andrew Bailey gave a speech on new prospects for money. In it, he said he wants to protect the status quo between central banks and financial institutions, but he highlighted the need for banks to innovate so this is possible.

Bailey pointed to the need for a new form of “enhanced digital money” with programmability as a feature. A central bank digital currency (CBDC) like the digital pound will fit the bill, but he doesn’t want central bank money to displace commercial bank money, which accounts for 85% of payments made by the U.K. public today.

“We want to encourage more thinking and action in the world of enhanced digital bank deposits – sometimes called tokenized deposits,” Bailey said, encouraging banks to take action. This should address some of the fears that central banks are releasing CBDCs in a bid for total control over national financial systems.

Treasury sandbox for digital securities

In other news, HM Treasury published its consultation document for its Digital Securities Sandbox.

The aim is to ease regulations for digital securities, which the Treasury acknowledges could be “genuinely transformative” for markets.

The U.K. sandbox will run for five years initially. In order to participate, firms must be U.K.-based, have a clear business plan for the product or service it wants to test, have a risk management plan in place, and must agree to provide feedback to regulators. The sandbox will launch in 2023 to a limited number of firms but will expand as time goes on.

What asset classes will be included? Debt, equity, and money market instruments are all allowed, but notably, digital currencies like Ethereum and XRP are excluded.

In its consultation document, the Treasury stated it doubts that a public, permissionless blockchain can be compliant, but it is open to counterarguments.

The sandbox will allow regulated U.K. financial institutions to experiment with and test digital securities products and services in a live environment without complying with existing financial regulations. This will allow them to assess risks, provide valuable feedback to regulators, and promote innovation in the digital securities market.

BOE working on CBDC identity layer

Recently, CoinGeek reported that the Bank of England is working with payments and identity firm Nuggets to build a CBDC identity and privacy layer.

The solution will use zero-knowledge proofs to protect user privacy while ensuring compliance with AML/CTF regulations.

It’s unclear exactly what the solution will look like, but it is proof that the Bank of England is taking privacy concerns when it comes to CBDCs seriously.

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.

Central Bank Digital Currencies and Blockchain: The view from the Swiss National Bank

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