The UK Treasury and the Bank of England are designing a “digital pound” that could replace banknotes by the end of the decade and fend off a Big Tech competitor.
With the decline of cash, ministers and officials feel there is likely to be a need for a publicly backed digital currency that would sit in a wallet on a smartphone and be used for purchases like notes and coins.
Consumers already accustomed to rapid digital payments will see few obvious differences, but the core infrastructure will be part of the central bank and can be guaranteed to be available for use by all.
Officials believe that a digital pound would ensure that the BoE retains control of the heart of the UK’s financial system and prevent any private company from making payments within a closed network.
A final decision on whether to proceed will be taken around 2025, the Treasury said, when it will decide whether the potential benefits of implementing new payments infrastructure outweigh the costs and risks.
One potential danger previously identified by the House of Lords and the BOE is that a new central bank digital currency could increase financial instability if households and companies simultaneously withdraw money from commercial banks to put into the government-backed digital pound.
To guard against this, the Treasury said it would initially impose a limit on the amounts that can be held in new wallets, even though such limits would reduce the digital currency’s usefulness as a payment system.
In launching the detailed design, officials are seeking to ensure that a digital pound can play a similar role to cash – allowing seamless payments, accruing no interest and forming the backbone of currency in the UK.
This, they think, will help knit together a variety of private sector payment systems, ranging from debit and credit cards to fintech companies such as Monzo and Revolut and new stable coins from cryptocurrency providers.
BoE Governor Andrew Bailey said the case in favor of a central bank digital currency “continues to grow”, but highlighted that “a profound decision is needed for the country on the way we use money”. needed to be addressed before taking”.
The private sector is already providing effective payments infrastructure, with a House of Lords report last year saying central bank digital currencies were “a solution in search of a problem”.
Official digital currencies are still gaining popularity in central banking circles. According to the Atlantic Council, by December 2022, 114 countries are exploring CBDCs. Some 30 governments, including China, the Bahamas and Jamaica, have either fully launched CBDCs or are currently running pilot schemes.
Justification varies. Analysts see China’s “digital renminbi” as a way to support greater surveillance and provide an alternative to domestic and international payment systems. The Bahamas’ central bank has listed financial inclusion and strong anti-money laundering systems as its rationale for launching the “sand dollar.”
An investigation into a digital euro launched by the European Union is due to conclude in October, after which the bloc will decide whether to start development. In the US, the Federal Reserve Banks of Boston and New York are investigating the retail and wholesale use of CBDCs, respectively.
