Today HM Treasury and the Bank of England are launching a consultation into a retail central bank digital currency (CBDC) commonly referred to as a digital pound. The central bank also published a Technology working paper. That’s despite significant skepticism expressed during recent parliamentary hearings.
In terms of timelines, following further technical research, a decision will be made around 2025 with a potential launch towards the end of this decade.
The report states, “the Bank of England and HM Treasury judge that it is likely a digital pound will be needed in the future.”
Digital pound motivations
Given the UK has robust payment systems enabling people to make bank transfers in real-time, the need for a BritCoin is less obvious. But the Bank of England Governor Andrew Bailey hinted at the motivation.
“As the world around us and the way we pay for things becomes more digitalised, the case for a digital pound in the future continues to grow. A digital pound would provide a new way to pay, help businesses, maintain trust in money and better protect financial stability,” said Bailey.
“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.”
With increasing digitization, cash usage could decline, making the average person’s use of central bank money less pervasive. Providing a digital pound not only enables private access but supports interoperability between private currency and payment systems. For example, in the UK it is hard to withdraw money from PayPal to payment provider Wise.
“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,” said Jeremy Hunt, Chancellor of the Exchequer.
“That’s why we want to investigate what is possible first, while always making sure we protect financial stability.”
Today’s consultation paper states that the two motivations are to continue to provide central bank money as a risk free anchor and to promote innovation, choice and efficiency in payments.
During a parliamentary hearing last month, Governor Bailey expressed an opinion that for private digital currencies such as stablecoins to be robust and trustworthy, they would need to be backed by money deposited at the central bank, a so-called synthetic CBDC. Doing so starts to blur the line between commercial and central bank money.
The Bank of England is already conducting research, including a wallet project and developing an API to enable payment providers to connect to a CBDC system.
The digital pound consultation paper
The key features of a proposed digital pound include:
- wallets provided by the private sector
- privacy protected but not anonymous
- personal data not available to the government (except law enforcement)
- no interest paid
- programmability only controllable by users not government
- restricted amounts initially
- intended for everyday use
- available for UK and non-UK residents
- available to individuals and businesses.
The CBDC work is now transitioning from the exploration phase to the design phase. The dual goals of this set of work are to develop an architecture for a digital pound and to carry out experiments and proofs of concept. This phase is expected to run until 2025/26 when a decision will be made on whether to proceed with a major investment.
Work on the final build phase will start in 2025 at the earliest and involve developing prototypes and piloting. Only after that will a decision be made on whether to launch.
More to follow.
