If you can’t beat ’em…The UK proposal for a digital pound and the global approach to Central Bank Digital Currency

The Bank of England and HM Treasury have issued a consultation document on the introduction of a digital pound in the UK. The digital pound, or central bank digital currency (CBDC) is intended to be an alternative form of cash, interchangeable with real cash and bank accounts. It will be available to everyone, including non-UK residents, for everyday payments, in store and online. The UK Chancellor of the Exchequer, Jeremy Hunt, made it clear that a CBDC will not replace cash and there will be protections for the vulnerable.

Andrew Bailey, Governor of the Bank of England, explained the rationale behind the digital pound:

‘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.’

The current thinking is that the Bank would provide the central infrastructure in the form of a core ledger, but users of the new money would access their funds through digital wallets provided by the private sector, that is banks or other regulated institutions. The digital wallet would be accessed via a smartphone or smart card.

The Consultation Document assures us that, ‘to support trust and confidence, the digital pound would be subject to rigorous standards of privacy and data protection’. The digital wallet provider would need to identify the user, in the same way as they would if a person wished to open a bank account, in order to prevent money laundering and other financial crime. Neither the Government nor the Bank would have access to the user’s personal data.

A CBDC is not a cryptocurrency. Unlike crypto, it is centrally controlled. It is also backed by a central bank and is equivalent to ‘normal’ money, so that it does not fluctuate in value.

At present, only El Salvador and the Central African Republic accept Bitcoin as legal tender.

When it comes to CBDCs the UK, far from being ahead of the pack, is only one of 114 countries worldwide, representing over 95% of global GDP which are exploring a CBDC. 11 countries including the Bahamas, Jamaica and Nigeria have already launched a CBDC and China’s pilot programme is set to be extended to most of the rest of the country this year. All the G7 economies are developing a CBDC and 18 of the G20 are at an advanced stage, with seven of those countries running pilot schemes. Countries at the pilot stage include Russia, Australia, Sweden, South Africa and Saudi Arabia, among others. The US, Canada and most of Europe, like the UK is at the development stage. The issue is not whether the UK should introduce a digital pound, but how and when.

The stated benefits of CBDCs include promoting financial stability and trust in money through the security of a government backed currency, providing a boost to financial inclusion, especially where access to the banking system is difficult, making cross-border transactions faster and more efficient, reducing counterfeiting of currencies and even mitigating the effects of climate change.

There are, of course, potential downsides. A digital currency is vulnerable to hacked wallets and data theft, as with other digital information. At the national scale, there is the threat of a hostile country hacking and disrupting another country’s banking system. An alternative cross-border payment system could undermine sanctions imposed by the international community.

The UK Consultation makes it clear that the privacy of users and their autonomy to spend their money as they wish will be respected. The private sector providers of access to the digital pound will only use personal information to prevent criminal activity and the Bank and the Government will have no access to personal data. Some governments may not be so fastidious and CBDCs would allow those countries which wish to mine personal data to do so.

CBDCs could also be used to control consumer behaviour. It seems that China’s pilot digital Yuan gives the government the option to apply expiry dates so that people would have to spend the digital currency or lose it, enabling the government to accelerate consumer spending. It would be possible for a country to programme its CBDC to be valid only for certain purchases or for certain retailers and the government could track where and when people spend their money and what they spend it on. This may be a dystopian vision of the possible, but privacy and security are clearly major issues that the UK government and others will need to grapple with.

In a public consultation on a digital Euro, 43% of the respondents, ranked privacy as the most important feature of a CBDC. Christine Lagarde, President of the European Central Bank, said, ‘We should at least provide a level of privacy equal to that of current electronic payment solutions’, echoing the UK’s approach. As in the UK, there would not be full anonymity in order to counter financial crime.

It seems clear that a digital pound is coming down the track. If the government wants it to be widely taken up, it will have to deliver on its promises of security and rigorous protections of privacy and personal data.

View the HM Treasury’s consultation document.

Read more insights from our private wealth team.