UK steps up planning for digital pound currency backed by BOE

The Bank of England and the UK Treasury stepped up work on creating a digital currency to sit alongside physical banknotes and sought to allay concerns that the work could threaten the stability of banks.

Officials at the two institutions said a central bank digital currency, or CBDC, which has been unofficially dubbed “Britcoin,” could present significant opportunities for UK consumers and businesses after it’s rolled out as early as the second half of this decade.

The moves are part of an effort by central banks around the world to adapt to new forms of payment that work more quickly and smoothly in online transactions. It also is aimed at keeping the government involved in supplying money as consumers shift to card payments backed by companies and not the government.

“While cash is here to stay, a digital pound issued and backed by the Bank of England could be a new way to pay that’s trusted, accessible and easy to use,” Chancellor of the Exchequer Jeremy Hunt said.

The remarks brush aside criticism from the House of Lords economic affairs committee, which said CBDC is a “solution in search of a problem” and could lead to further financial exclusion for vulnerable households who depend on physical cash.

In a consultation paper due to be published Tuesday, the BOE and the Treasury will call for opinions and evidence on whether they should build what has officially been termed a digital pound. They haven’t made a decision on whether to move forward with the project, but the work is building the case for action.

A separate working paper will also attempt to assuage worries that the proposed CBDC could pose a risk to financial stability by sucking money out of the banking system. The BOE said holders will not be able to earn interest on their digital coins, and there will be a limit on how many they can initially buy.

That measure is aimed at preventing a mass rush of consumers pulling their money out of traditional banks and buying Britcoin, if it launches.

The central bank and Treasury are likely to face further questions on what exactly would be the point of the digital pound, as for now, at least, consumers would see little difference to just using existing online payment systems.

Though a CBDC would be based on blockchain technology used by speculative cryptocurrencies such as bitcoin, it would be issued by the Bank of England and would be backed by sterling, becoming interchangeable with cash and bank deposits.

“A digital pound would provide a new way to pay, help businesses, maintain trust in money and better protect financial stability,” BOE Governor Andrew Bailey said. “However, there are a number of implications which our technical work will need to carefully consider. This consultation and the further work the bank will now do will be the foundation for what would be a profound decision for the country on the way we use money.”

Many experts have yet to be convinced of the value of a CBDC. Former BOE Governor Lord Mervyn King has called the Britcoin project a “solution without a problem.” Lawmakers on the House of Lords Economic Affairs Committee found in a report last year that there was “no convincing case” for launching a CBDC in the UK.

Bank and Treasury officials are focused on the long-term when looking at the case for a CBDC, imagining a world where cash is used less and “big tech” firms such as Inc. and Google owner Alphabet Inc. are issuing their own stablecoins to facilitate quick and smooth online payments.

A CBDC would be designed as an alternative to these private sector stablecoins, which investors can hold in the confidence that they are backed by the BOE.

And by offering an “open” and “transparent” alternative to private stablecoins, it is understood that the Treasury hopes to discourage opacity in other digital currencies.

Critics are also concerned that the introduction of a digital coin would lead to the phasing out of physical notes and coins, which would disproportionately affect older, lower-income and vulnerable households who tend to use cash more.

A decision on whether to push ahead with Britcoin will likely be made around the middle of the decade. If the project does proceed, the CBDC could launch around 2030.

Neither the Treasury nor the Bank has yet produced a forecast of what it might cost to build Britcoin, but it is likely to be a substantial sum.

Prime Minister Rishi Sunak set up a taskforce during his time as Chancellor to explore the opportunities presented by a digital pound, and has spoken about his desire to make the UK a leading hub for cryptocurrencies and digital payments.

Labour’s Shadow City Minister Tulip Siddiq said the CBDC was a “welcome contrast to the Conservative Government’s promotion of the crypto wild west, which has put millions of peoples’ savings at risk”.

She added that should Labour win a majority at the next general election, due to be held by January 2025, it “would be serious about attracting fintech companies to the UK by safely harnessing the potential of new technologies and our ambition to make Britain the home-grown start-up hub of the world.”

The point of a digital pound

The value of the CBDC would be directly linked to sterling, unlike bitcoin whose value moves around with demand.

Rather than having to open a bank account, a consumer would have a digital wallet account on their smartphone or computer – and these could be operated by a variety of firms.

Because the wallet providers would effectively act as a conduit between the Bank of England and the customers, and would not be able to hold the digital coins or lend them out like a traditional bank, officials are hoping they would focus on providing innovative customer service.

Britcoin holders could also choose how much of their personal data they wanted to make available to other firms, under the Bank and Treasury’s plans, potentially allowing them to access other services tailored to their spending habits.

While the Treasury insisted that the CBDC would be “subject to rigorous standards of privacy and data protection,” and neither the government nor the bank would have access to a person’s data, it would not be anonymous.

Consumers would still have to go through know-your-customer checks when opening a digital wallet, and law enforcement agencies could still request customers’ information to prevent crime in the same way they can with bank accounts. –BLOOMBERG