Does the UK need a digital pound?

Are digital currencies the future of money? After the ‘crypto winter’ and a number of high-profile scandals, you could be forgiven for thinking that the answer is ‘no’. 

Yet 114 countries, representing over 95 per cent of global gross domestic product (GDP) – including the UK – are exploring a central bank digital currency (CBDC). Eleven economies have already launched one (see chart). Could a digital pound be the future of UK money? 

‘Britcoin’ is not bitcoin 

Bank of England (BoE) deputy governor Jon Cunliffe stressed last month that the digital pound must not be “confused in people’s minds with crypto assets such as bitcoin”. Unhelpfully, the digital pound has been referred to as ‘briticoin’ ever since.  

But the two offerings would be very different. Crypto assets have no intrinsic value and highly speculative valuations, whereas a CBDC would simply be a digital form of the money already issued by the central bank. 

Crucially, no interest would be paid on a digital pound, as with notes and coins today. Its purpose would be to make and receive payments, rather than to act as a savings (or speculative investment) product. 

What could a digital pound do? 

There are hopes that a digital pound could allow faster and cheaper transactions. Cross-border payments in particular are ripe for improvement: often clunky and expensive with average costs totalling 6 per cent of the value sent. But technology has its limits. Officials warn that cross-border differences in technical, business and regulatory standards may be more difficult to overcome. 

A CBDC could also facilitate micropayments, revolutionising access to ‘fleeting’ services: customers could pay for a single news article rather than signing up for a monthly subscription. A digital currency could also allow for programmable money, revolutionising direct debits and standing orders. 

Do we really need one? 

If you don’t think that the use case sounds overwhelmingly convincing, you’re not alone. BoE governor Andrew Bailey told the Treasury Committee that he was “not convinced about some of the problems that we might be trying to solve”. 

But the use case for a CBDC may become clearer in the future, and in the meantime, the global race to develop digital currencies runs on. Cunliffe told the Treasury Committee that “if we wait until we can say, ‘OK, now we think it is needed’, we would be five years behind”. 

There is also a more abstract institutional rationale for a digital pound. Bank notes and cash are the only way that consumers can access central bank money – funds in bank accounts are provided by commercial banks. This may seem like a subtle distinction, but it could have bigger consequences if cash use continues to decline: in the UK, cash was used for 60 per cent of transactions 15 years ago, but features in just 15 per cent today. 

BIS economists previously noted that if cash disappears “the public would be wholly dependent on commercial money, and trust in the currency, a key public good, would be reliant on the creditworthiness of commercial entities and on specific payment technologies”. 

What are the wider impacts? 

But this relationship between commercial and central banks could pose financial stability risks. If customers moved their retail deposits into this new digital money, commercial banks could see their funding affected, which could trigger higher lending rates. The idea is that Digital pound holdings would be limited to £10,000-£20,000 per individual, which should ensure a 20 per cent maximum outflow from the banking system. 

But would CBDCs mean the end for thousands of existing speculative crypto tokens? CBDCs could, after all, offer the transactional benefits of crypto assets, without the attendant price volatility. But they could perhaps inadvertently bolster the sector: regulators have long worried about lending a ‘halo’ effect to crypto assets by encouraging false expectations of consumer protection. 

Then there are inevitable questions of fraud. Laith Khalaf, head of investment analysis at AJ Bell, warned last month that “consideration should also be given to the fact that any sweeping financial innovation is likely to be a rallying cry for scammers, who will flock to the scene of any confusion to misappropriate funds wherever possible”. Plans are, for now, a work in progress.