As the world of finance rapidly evolves, the UK is contemplating the introduction of a Central Bank Digital Currency (CBDC), specifically a retail CBDC or ‘digital Pound.’ This concept differs from cryptocurrencies like Bitcoin and Ether, as it would be a direct liability of the central bank. UK Parliament recently published a report entitled “The digital Pound: still a solution in search of a problem?” in which they have outlined their current position on the possible implementation of a CBDC.
When is a digital Pound likely to be introduced?
The Bank of England and HM Treasury have been exploring a ‘platform model’ for the digital Pound, which involves a core ledger maintained by the Bank of England and private sector involvement for user interface and wallet management. The design phase is expected to run until 2025/2026, with a subsequent decision on whether to proceed with its construction. If a digital Pound were to be released, it is expected to arrive somewhere around 2030.
How would a digital Pound sit amongst existing forms of money?
The UK economy currently operates with three main forms of money: physical cash, bank deposits, and central bank reserves. A retail CBDC would be a new, digital form of public money, akin to a digital banknote, accessible to households and businesses.
Could a digital Pound help Financial Inclusion?
The potential for the digital Pound to support financial inclusion is recognised, including the possibility of offline payments for those with limited internet access. However, there’s an inherent risk that the introduction of a digital Pound could exacerbate financial exclusion, especially among those reliant on physical cash.
What about Privacy and Data Protection?
Concerns about privacy and data protection are paramount, with emphasis on strong privacy safeguards and transparent usage of consumer data. The proposed legislation suggests stringent controls on how user data from the digital Pound can be used, particularly by the government and Bank of England.
What about the costs of implementing a digital Pound?
The development of a digital Pound will incur significant costs, necessitating a transparent and controlled expenditure process. The decision to launch a digital Pound must be based on a rigorous cost-benefit analysis, remaining neutral and not seen as an inevitable outcome of the design phase.
The potential benefits of a digital Pound include supporting innovation and guarding against risks posed by new forms of private digital money. However, the extent of these benefits and whether the digital Pound is the best solution remain unclear. A cautious approach is suggested, especially concerning its impact on financial stability and privacy. The report calls for detailed criteria to assess the case for a digital Pound and emphasises the importance of not allowing the project to distract from the Bank of England’s primary tasks of controlling inflation and maintaining financial stability.