The future role of digital public money

Author: Jannah Patchay, Policy Lead, Digital Pound Foundation

The Digital Pound Foundation is committed to supporting the development of a well-designed digital Pound. This might be in public (central bank-issued) or private (privately issued stablecoins) form, and most likely a combination of the two – and an effective and diverse ecosystem for these new forms of digital money in the UK. A digital Pound will form part of the foundational infrastructure that will underpin the UK’s transition to a digital economy, as well as provide a platform for future innovation and leadership on the world stage. 

There is undoubtedly value and benefit to be gained – for all sectors of society and the economy – from having a diverse, competitive, and well-regulated environment for private issuers of digital money (or “systemically important stablecoins”, as they’re frequently termed by regulators and central banks). However, there is also a continued role to be played by access to public, central bank-backed money, and our view is that the future of public money lies in central bank digital currency (CBDC). 

Why do we need public money?

Access to public money is of fundamental importance to maintaining trust within the UK’s financial system – and public money also represents a fundamental expression of the relationship between a nation and its inhabitants. Despite the rise of commercial bank money and the corresponding decline in cash usage, cash remains an intrinsic part of the money ecosystem, and millions of UK citizens still depend on using it for many reasons. Ultimately, public money represents the only fully-accessible and inclusive form of money that we have. As physical cash use declines, the case for introducing a digital alternative to publicly issued cash – whilst not necessarily supplanting cash in its entirety – grows ever stronger. 

Furthermore, a more radical shift towards greater use of private money could result in a system where some members of society are left behind due to the focus of the private sector on more commercially advantageous customers. Financial inclusion remains a key priority area for the Bank of England, and maintaining access to public money is a means of ensuring that such policy objectives can be delivered. Public money also represents a fundamental policy implementation and delivery mechanism for the UK government (across use cases ranging from benefits delivery to tax collection), which could be strengthened in the future through the introduction of a functionally-rich CBDC.

What can we do with a digital form of public money?

As a digital form of public money, a CBDC could have significant benefits for the public, and act as a potential differentiator and accelerator of innovation for a global UK. Unlike cash, a digital CBDC could enable micropayments or otherwise be “programmed” for specific uses to support government aims, including macroeconomic and social policy delivery, and to facilitate an improved transactional relationship and experience between individuals, businesses, and the state. Accessing digital money usually requires no more than a smartphone. This type of technology could bring many of the unbanked or underbanked into the UK’s financial system for the first time. 

While we believe that the public should continue to have access to public, central bank-issued money, we also believe in the importance of providing consumers with choice. Privately issued digital currencies, such as stablecoins, may be designed to provide functionality and associated benefits that a CBDC cannot, or that are not necessarily desirable in a CBDC. We also fully acknowledge and support the need to have appropriate safeguards in place to ensure that privately issued coins and stablecoins do not destabilise the financial system. The Digital Pound Foundation anticipates a rise in privately-issued tokenised sterling currency – in the form of stablecoins or e-money tokens. A regulated form of systemic stablecoin, issued by regulated entities, fully redeemable by users, and interoperable with both existing and other new forms of digital money, will be important to the UK, as the programmable nature of stablecoins can deliver greater operational efficiencies and foster innovation in the payments space.

From an international perspective, CBDC is a necessity for any nation-state wishing to preserve its sovereignty in determining fiscal and monetary policy in a world that will be increasingly fuelled by both privately operated, decentralised digital currencies and other types of digital assets. The exercise of sovereign power by a nation is closely linked to its ability to leverage and exert influence through its currency and how that currency is perceived and used at both domestic and international levels. 

Benefits of a public digital Pound

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 underpin 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. They could provide a foundation for building a more digital economy, propelling the UK forward in the Fourth Industrial Revolution, and be leveraged as drivers of greater financial inclusion. 

The introduction of a CBDC will, in our view, form a core part of the infrastructure underpinning the UK’s transition to a digital economy. It is inevitable that the UK’s payments and settlements infrastructure must transition to support the innovative possibilities opened up by CBDCs and other new forms of digital money, including but not limited to:

  • 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 individuals.
  • 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 assets and digital asset markets, both in the traditional financial sector and in emerging paradigms such as the Metaverse. 
  • 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 the government to interact with citizens and businesses, including, post-Covid, via inventive new economic stimulus and recovery programmes.

The road to adoption

When it comes to the adoption and uptake of a CBDC, a core issue at stake is public confidence. Privacy will be a deterministic factor in this respect, and the introduction of a CBDC that does not encompass sufficient protections for privacy in its design will likely face stiff competition from stablecoins (and indeed, other national CBDCs) that do prioritise such features. Additional features such as interoperability between commercial and central bank-issued tokenised currency could boost consumer confidence. There may also be use cases and needs where central bank-issued money is preferred (likely to be dependent on its design characteristics), particularly for existing heavy users of cash. 

Should the UK implement a CBDC, we anticipate the need for an extensive transition and education programme in place for the general public. Uptake will rely on clearly articulating the benefits and implementation considerations around a CBDC, including how its characteristics, benefits, and risk profile compare with cash, existing commercial bank money, and other privately-issued stablecoins, so as to ensure informed decision-making by the consumer. 

Conclusion

The UK faces a period of great change and new challenges in light of the combined impact of Brexit, the global Covid-19 pandemic, and the ongoing conflict in Ukraine. A nation’s currency is not only its store of value, unit of account, and medium of exchange; when deployed strategically, it has the potential to create new economic opportunities. A well-designed digital Pound has the potential to breathe new life into the UK’s currency on the global stage, and the introduction of a sovereign currency that is able to participate fully and actively in digital ecosystems will enable the UK to further build on its economic and social development and growth.

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