Bank of England Reveals Plans for a New Digital Currency for the UK
The Bank of England recently revealed its vision to create a central bank digital currency in response to the increasing popularity of cryptocurrencies. Touted as “Britcoin” or “digital sterling,” the digital currency is intended for day-to-day spending, both in-store and online.
If plans for a new national digital currency are approved, experts predict that the Bank of England will initially limit individual spending. However, transactions would not be subject to an interest rate. Nevertheless, many questions remain regarding how increased digitization might impact cash users.
Cash would continue to be available
Tom Mutton, the Bank of England’s head of central bank digital currency, suggested that cash would continue to be available for as long as people wanted to use it. He said that a digital currency would provide more privacy than many expect, explaining that 90% of the money used for payments today in the UK is electronic. Although he acknowledged that all electronic money creates a data footprint, Tom Mutton suggested that it would be the user’s choice who they wanted to share data with and how it should be protected, and that no data would be shared with either the Bank of England or the UK government. However, caution has been urged in some quarters, with experts warning that the move could infringe on user freedom by creating a currency footprint.
Use of paper money has dropped considerably in the UK since the pandemic, with many turning to cards and contactless payment methods. Nevertheless, some 5.4 million adults in the UK remain reliant on cash, with experts warning that many would struggle if notes became sparse. According to a survey by UK finance, cash still accounted for 15% of payments in 2021. Meanwhile, research from LINK suggests that 73% of consumers completed some transactions in cash in January 2022. Indeed, Nationwide even suggested that cash may be making a post-Covid comeback in the UK, with a 19% increase in cash withdrawals in 2022 compared with the previous year.
Today, some 130 countries are exploring the viability of launching digital versions of their currencies. Combined, these countries account for 98% of the global economy. Almost half are in advanced development, pilot or launch stages.
Countries developing national digital currencies
The US-based Atlantic Council think tank recently published research suggesting that all G20 countries except for Argentina were already in one of these advanced phases of developing their own national digital currencies. Eleven countries, including Nigeria and several Caribbean countries, had already launched central digital currencies, or CBDCs as they are known.
Meanwhile in China, pilot testing has now reached some 260 million people, covering 200 different scenarios, from government stimulus payments to ecommerce. Two other large emerging economies, namely Brazil and India, also plan to launch their own digital currencies in 2024. While more than 20 other nations are also taking significant steps toward launching pilot schemes before the end of this year, the European Central Bank is on track to launch its digital Euro pilot, ahead of a possible rollout of its digital currency in 2028.
In the United States, progress on the digital dollar is restricted to a wholesale or bank-to-bank version, according to the Atlantic Council’s research, which suggests that work toward a retail version has stalled.
Digital pound would be a new type of money
The Bank of England describes the digital pound as a new type of money for UK citizens to use for everyday spending, enabling them to make both online and in-store payments. It suggests that the digital pound’s value would be stable, just like banknotes, with £10 in digital currency maintaining the same value as a £10 banknote. The Bank of England makes clear that the digital pound would not be a form of cryptocurrency or crypto asset, since while these are issued privately, the digital pound would be issued by the Bank of England, and backed by the UK government.
Ultimately, before launching its digital alternative to the banknote, the Bank of England will need to decide whether Britcoin is worth building in the first place. The bank is currently conducting market research to determine the appetite for a CBDC, and whether it can work, its public consultation period having started in February, and ending on June 30, 2023. After evaluating all of the advice it has received, the bank will need to evaluate technology and process requirements before announcing a final decision, a process that could potentially take years to complete.
In the United States, while a digital dollar appears to be some way off, Washington recently announced that it was investigating its creation. Earlier this year, the Federal Reserve Bank of New York launched a 12-week pilot scheme to test the use of a digital dollar.
The progression towards a digital economy is evident as countries worldwide, including the UK, explore the concept of central bank digital currencies (CBDCs). The Bank of England’s proposed ‘Britcoin’ or ‘digital sterling’ exemplifies the myriad of potential benefits such currencies could bring — from swift and affordable transactions, heightened privacy controls for users, to enhanced financial inclusion for the unbanked population. Despite certain reservations and apprehensions about potential risks to individual liberty, it’s clear the march towards digital currencies is gathering pace. The eventual impact on the UK’s and the world’s financial landscape remains to be seen, yet these pioneering steps are undeniably guiding us towards a new era of digital finance.