The ‘digital pound’, a central bank digital currency (CBDC) for the UK, also dubbed ‘Britcoin’ will “likely” become a reality.
The Treasury and the Bank of England have released a consultation paper, putting a case ahead for the introduction of a state-backed digital pound, or CBDC.
Post-pandemic, the number of people regularly using cash has dropped dramatically. Instead, digital payments have begun to take precedence. However, the digital payments space is far from settled.
The evolution of the payments landscape could be a deciding factor in whether we actually see the introduction of the digital pound. The Treasury and the Bank of England look to ready a CBDC in response to potential new forms of privately-issued digital money which could impact the UK economy.
How CBDCs perform in other parts of the world will also likely have an impact. The Bank of England may wait to consider the impact of other CBDCs, such as China’s digital yuan, on both their own and global economies before making a final decision.
Ian Taylor, board advisor at trade association CryptoUK, welcomes the next step for a digital pound: “This will bring the UK in line with the European Central Bank and a growing number of forward-thinking nations including many G7 countries, which are exploring the benefits of this payment instrument.
“We look forward to discussing the positive impact a UK CBDC could have on financial inclusion, stability and operational efficiency in an increasingly cashless society with policymakers and regulators. We will also look for opportunities to collaborate with other associations here in the UK and globally, and connect with other jurisdictions in the process of developing and implementing their own CBDC solutions.”
What does the proposed digital pound look like?
The Bank of England suggests that a digital pound would maintain public access to retail central bank money. It also hopes that the introduction of the CBDC in the UK would encourage greater innovation, choice and efficiency in domestic payments.
The new digital fiat currency would be equivalent to the value of cash. Five pounds of the CBDC would be exactly equivalent to a £5 note. This differentiates CBDCs from existing cryptocurrencies, as they promise to be much less volatile, despite making use of the same technology at their core.
Initially, there would most likely be a limit on the amount of the digital pound that each person can hold. This is done to control any unintended consequences, by monitoring the impact of the digital currency. Eventually, the Bank of England will alter the limit; either by raising it or removing it.
Jorge Lesmes, banking director at Tokyo-based information technology service NTT DATA, said: “With Singapore, Turkey, Spain and China, to name just a few, already exploring the use of CBDCs, it is unsurprising to see the Bank of England exploring the benefits of digital currencies again.
“The UK has had a CBDC taskforce in place since April 2021. As banks and government bodies look to adapt to an increasingly digital economy, CBDCs offer an opportunity to leverage the benefits of crypto with less inherent risk.
“The key hurdle for the Bank of England to overcome is gaining public acceptance of a new digital currency as some members of the public have understandable fears over cash being phased out entirely. However, the current plans are to maintain digital and physical currencies in tandem. Furthermore, for banking customers, digital currencies could offer them increased freedom in the way they use their money.”
Good news for fintechs?
The news appears to reaffirm the government’s position to continue investing in the fintech industry. While a digital currency would encourage innovation, fintechs could become an important part of the UK’s digital currency.
Adam Jackson, director of policy at fintech industry body Innovate Finance, explained the potential positives of a CBDC. Jackson said: “UK plans for a digital pound reinforce the UK’s global position for investment in fintech.
“A CBDC, together with UK plans for regulated stablecoins and recognition of smart contracts under UK common law, can stimulate a new wave of innovation in payments, with the potential to further increase productivity across the economy, offer citizens new services, and widen access to digital finance.
“The platform model proposed for the UK provides the basis for a diverse, competitive and open market of service providers, which will stimulate further innovation and attract investment in the UK.”
Chris Ford, head of government affairs EMEA at R3, also explained the significance of the news: “The Treasury’s plan to investigate the design of a digital pound is a significant moment for the fintech sector and demonstrates the UK government’s serious intent about putting technology at the heart of our financial services industry.
“Regulated CBDC, built on distributed ledger technology, can enhance efficiency across our financial market infrastructure and solve real problems that have held us back for decades.
“Following last week’s proposals to regulate crypto assets, it is clear that the government sees DLT as a core pillar through which it can drive financial innovation. Amidst rising competition from Europe and elsewhere, the application of blockchain and related technologies will be key in ensuring the UK retains its status as a global hub for financial services.”
‘Policymakers must proceed with caution’
While the news looks positive for the future of fintechs, questions still remain over how the digital pound can be created to benefit everyone.
With some displaying concerns over the potential for reduced cash flow for retail banks, apprehension still remains over how consumer data may be used and how the government may control the digital pound.
Jai Bifulco, chief commercial officer at Kinesis Money, warned of the potential negative effects the introduction could bring. Bifulco said: “The introduction of CBDCs awards governments with a heightened level of control over the population’s financial data. So far, global governments have welcomed CBDCs with open arms. They can also provide real benefits for them, such as insights based on real-time economic data; which could influence the introduction of new monetary policies as well as tax reforms.
“Looking ahead, policymakers must proceed with caution. With access to previously untapped data, CBDCs could give governments new, unprecedented levels of control. The potential for governments to make instant policy changes could have negative repercussions on CBDC users – powers that, without sufficient regulation, have the potential to be misused.
“For any new centralised digital monetary system must have concrete, foundational principles around regulation and user privacy built into its design. The system should also be independent, with a focus on bringing economic freedoms and autonomy to its users.
“A better alternative would be a solution that allows citizens to opt out of the flaws and inefficiencies of traditional monetary systems – and opt-in to a government-independent digital asset ecosystem that solves existing monetary problems with the assurance of financial sovereignty.”