The Bank of England reports that around 95 per cent of the funds that people hold to make payments are now held as bank deposits rather than cash. This, combined with the increasing interest in digital assets like cryptocurrencies, means that surely now is as good a time as any to be thinking about the digital pound, and whether the UK will introduce a central bank digital currency (CBDC) in the near future.
The story so far
Our story somewhat begins with the Kalifa Fintech Review released earlier this year. The hugely anticipated report was conducted by Ron Kalifa OBE, chairman of Network International and former Worldpay CEO, to identify priority areas to support the UK’s fintech sector as commissioned by the government.
One of the key takeaways from the report is the recommendation to promote the digitisation of financial services, specifically in order to improve the environment for fintech, provide better services to consumers and drive efficiency in the financial sector.
A Treasury spokesperson said: “We’ve set out a roadmap to sharpen the UK’s competitive advantage and deliver a more open, green, and technologically advanced financial services sector. The UK is already known for being at the forefront of innovation, but we’re going further to support UK fintech by introducing new visa routes, enhancing our pioneering regulatory sandbox, reforming our listing rules and exploring a central bank digital currency.”
This, clearly, is where CBDCs come in, with the report advising that ‘the introduction of a central bank digital currency would be a significant development which could help support the development of new technologies’.
To that end, Chancellor Rishi Sunak followed the review by announcing ‘ambitious’ new plans to help fintechs scale, including the creation of a new joint task force from HM Treasury and the Bank of England to explore the possibilities of a UK CBDC.
The task force will engage widely with stakeholders on the benefits, risks and practicalities of engaging in a CBDC, and will explore and evaluate opportunities and risks of a potential UK CBDC.
Opportunity or threat?
The benefits of a UK ‘digital sterling’ certainly have the appeal, at least to the typical consumer. For starters, it will come as no surprise to anyone that the number of cash transactions are dwindling. The majority of payments made in the UK are through cards or other digital means, and notes and coins are becoming more unloved. It is this irrelevance that has some people concerned. People seem to be turning to Bitcoin and other cryptocurrencies to have a decision in how their money is spent.
However, these assets can be incredibly volatile as well as having some environmental concerns. Stablecoins are a great ‘middleman’, backed against something tangible like gold but not pegged to anything. Though there is very little evidence to suggest that people are turning to other digital currencies there is a fear that the costs of transactions in sterling could leave the currency vulnerable to stablecoins that could undermine financial stability in the UK.
A CBDC would be automatically guaranteed by the state, exactly the same as cash reducing the risks involved. It’s also hoped that a CBDC would reduce the cost of payments as well as increase the inclusivity of digital payments, which are currently not accessible to everyone.
One of the biggest opportunities, however, is the potential a CBDC would have to support new emerging technologies. With the wave of digitalisation over the past few years that’s only gotten bigger with the Covid-19, there is still much of fintech yet to explore.
Not only would a CBDC have application in fintech ideas, such as blockchain, it could also completely transform the payments industry as a whole. A CBDC would be an innovation in terms of both how money is provided to the public and also the infrastructure on which payments can be made. It would also increase transparency, allowing you to know exactly where your money had come from and help to eliminate financial scams, particularly when buying things like houses or stocks and shares. A CBDC would work alongside cash and bank deposits, but the clear decline in cash usage over the past 10 years makes it all the more enticing in order to tap into the potential of a new payments system and the fintech that could develop with it.
However, as with any new developments, there are also risks. And with CBDC’s, the main concerns revolve around the fact they are a centralised form of currency and may infringe on the privacy of citizens.
Jasmine Mirtles, CEO of MoneyMagpie, is particularly concerned about this – she said: “My big concern about CBDCs is the total control that governments will have over our lives through the central bank. The idea of a CBDC is that all transactions and all money flow will go through the central bank and the central bank (government) will know everything about our earning and spending at all times.
“They will know where we earn our money, how and when and will be able to tax us at source before we even get the money. They will then know where we spend it, how and when. They will also be able to ‘disappear’ our money at will, forcing us to spend it within a certain timeframe and on certain goods and services or simply switching the money flow off at the source. It will, essentially, destroy democracy and usher in a digital dictatorship. It cannot do otherwise.”
Legal and regulatory concerns also arise when thinking about CBDCs, as currently it isn’t really known who will regulate them. There are many questions surrounding this, pertaining to know your customer (KYC), money laundering and other hot topics in the regulation field that currently people don’t have the answers to. In order for CBDCs to be accepted as well as do their job, compliance risks must be answered.
CBDCs across the globe
While no country has officially launched a CBDC, yet, it’s not just the UK that are dipping their toes into the possibilities of the digital currency. As of July 2021, more than 80 countries were in various stages of exploring CBDCs, according to the Atlantic Council think tank, ranging from first inception to having actually been launched.
It’s no secret that China is the big name in the game when it comes to CBDC and is currently trialling its own digital yuan that has been in development for years. There are hopes that the Digital Currency Electronic Payment (DC/EP) will help accelerate the move to a cashless society and bring unbanked populations into the mainstream economy.
The central banks of Canada, Uruguay, Thailand, Venezuela, Sweden and Singapore, to name a few, are all also looking into the possibility of introducing a CBDC and are at various stages in development.
The future is digital
Ultimately, a CBDC would function as a true fiat currency, providing the convenience and security of digital cryptocurrencies with the regulated reserve backed money of traditional banking. A best of both worlds scenario will in theory bring a number of benefits to any country implementing it. While the UK government is still undecided as to whether they are moving forward with it, the treasury have made it clear that a CBDC – or “Britcoin” is in our future.