The British Crypto Currency backed by the Bank of England: Looking at the Digital Pound Consultation Paper

In February 2023, the Bank of England in collaboration with HM Treasury published its consultation paper titled, ‘The Digital Pound: A new form of money for households and businesses?’. The consultation sets out a proposal for the Retail Central Bank of Digital Currency, focusing on a soft launch of innovating everyday transactions by households and businesses.

Central bank digital currencies are a type of currency issued by the country’s central bank, in the UK’s case by the Bank of England. Unlike cryptocurrencies such as Bitcoin which currently sits at around £17,726.32 per coin, the value of the digital pound will be equivalent to the country’s currency value in alignment with GDP.

The Bank of England recognises the modernisation of currency is evitable, however, the consultation is taking place to help determine when would be an appropriate time to launch the digital pound as its development and implementation could take several years. The current priority of the Bank of England and HM Treasury is to step up development work, build the necessary skills and put in place the technical capability to introduce the digital pound in a timely manner, should a decision be made in future to do so.

How would the digital pound work in practice?

The digital pound would be used as a digital banknote. It would be initially designed for everyday payments, both in-person and online. The payment would make a direct claim on the bank, like a physical banknote or alternatively, a current account. As there is no interest to be paid on the digital pound this limits its function to everyday household transactions and makes it unsuitable for purposes such as savings accounts or investment portfolios.

The Bank of England reports it would create a seamless exchange, in which, you could exchange digital pounds for physical cash and vice-versa. Therefore, this would enable people to easily move money between digital pounds and physical cash.

The personal details of the account holder would be held with a ‘wallet provider’ instead of bank account providers such as Barclays or Halifax. A wallet provider is an entity that provides software for holding, storing or transferring digital currency. The Bank of England has stressed throughout the consultation that the Bank of England or the Government would not have access to any personal data collected using the digital pound.

How soon could the digital pound be introduced?

While the Bank of England has not committed to launching the Retail Central Bank of Digital Currency yet, they have set out a roadmap estimating when they will have a decision on whether to proceed with the introduction of the digital pound. The roadmap sets out three phases, the first being research and exploration which has been conducted in 2022. The second phase is ‘design’, which is estimated to occur from 2023 through 2025/2026. This phase consists of designing the digital platform. The last phase is ‘build’ which would take place at the earliest in 2025.

The plans for the digital pound do not stop at retail, the consultation also highlights the potential expansion of the Central Bank of Digital Currency into wholesale transactions.

Is there a possibility of a cashless society?

While it is accepted that the use of cash has substantial fell from 55% to 15% in the last decade and in 2017, we saw debit cards overtake cash for the first time. There is currently little support for a cashless society, Natalie Ceeney CBE warns in the Access to Cash Report 2019, ‘if we sleepwalk into a cashless society, millions will be left behind’. The Bank of England seemingly supports this proposition by stating they are committed to ensuring continued access to cash and recognising that around 1.2 million UK adults do not have a bank account.

What are the concerns surrounding the Digital Pound?

In a parliamentary debate which took place on the 7 th of February 2023, the digital pound was debated in the houses of parliament. Abena Oppong-Asare Labour MP voiced the concern the benefits of implementing a new payment infrastructure did not outweigh the risks to the privacy of the public. The Honourable MP for Erith and Thamesmead raised the question of whether the public can freely access a digital pound that doesn’t require them to hand over even more data to tech companies. MP Andrew Griffith for Arundel and South Downs made assurances that privacy will be embedded within the design.

However, the debate was consumed with criticism of the conservative government for not focusing on returning the economy to growth and dealing with the cost-of-living crisis, instead of chasing crypto fantasies. There has been significant pushback from the think tank ‘Tax Reform Council’ which has been reported to have launched a campaign warning that the introduction of the digital pound should seriously harm individual privacy and would lead to intrusion from tax authorities.

Looking to the future…

It seems that the opposition to the launch of the digital pound is focused on the invasions of privacy which could arise from its implementation. It is also interesting that the Bank of England is considering expanding into the crypto sphere after the numerous scandals we have witnessed such as the collapse of FTX, a thirty-two billion crypto exchange.

by

Katherine Pegg