Does the UK need a CBDC? What benefits would a digital Pound offer?

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The global economy, including cross-border trade, is moving increasingly to the digital realm, an effect heightened by the recent Covid-19 pandemic and associated “social distancing” and “work from home” requirements. The successful implementation and adoption of a digital Pound would recognise these trends and would deliver many potential benefits to the UK economy, its businesses, and citizens as they cope with such changes. A well-crafted digital Pound and its associated technologies can create the next generation digital infrastructure for all sectors of UK society, and will be integral to realising the following success criteria:

  • Promoting better, more certain and efficient value transfer and payments from source to destination – be it payments from governments to individuals, or vice versa, or payments between two parties.
  • Underpinning a payments and market infrastructure that can support greater financial inclusion and access to capital, for both individual citizens and small-to-medium enterprises.
  • Laying the foundation for the UK to become a world leader in the digital economy and the Fourth Industrial Revolution.
  • Supporting the development of digital markets and digital assets.
  • Enhancing the status of the UK’s currency as a desirable means of exchange, store of value and unit of account in global marketplaces.
  • Stimulating innovation and new technologies across all sectors of the economy and extending the UK economy’s reach well beyond its physical borders.
  • Encouraging private sector investment in digital infrastructure, job creation, and expansion of service offerings in all sectors of the economy.
  • Providing new ways for government to interact with citizens and businesses, including, post-Covid, via inventive new economic stimulus and recovery programmes.

The beauty and utility of a well-designed digital Pound ecosystem would lie in its flexibility and programmability to address a range of use-cases in different ways and across different systems, according to the nature of the participants in these systems and their requirements. This is reflective of the current split between wholesale and retail payments use-cases and infrastructure. Wholesale payments infrastructure is accessible only by financial institutions that are able to demonstrate compliance with certain regulatory and prudential requirements. The primary purpose of wholesale infrastructure is to effect the settlement of transactions, be these payment vs. payment (PvP) or delivery vs. payment in securities settlements (DvP). Retail payments infrastructure, on the other hand, primarily supports the needs of non-financial businesses and individual citizens.

The benefits delivered by a digital Pound vary depending on the nature of its usage. For example, addressing wholesale use cases will support greater settlement efficiencies in the wholesale markets as well as underpinning the development of both UK and global digital asset markets. Retail payments use-cases, on the other hand, have greater potential for transforming the relationship between government, businesses, and individual citizens, providing a foundation for building a more digital economy, propelling the UK forward in the Fourth Industrial Revolution, and to be leveraged as drivers of greater financial inclusion.

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