Syed Rahman details the progress made so far on plans for a UK central bank digital currency – and its implications.
The Bank of England (BoE) is creating what has been referred to as a “Digital Pound Lab’’ as it continues to prepare for the possibility of a UK central bank digital currency (CBDC).
The BoE and HM Treasury are in the design phase for a possible digital pound. If one were to be devised, it would require parliamentary approval, which would involve the passing of legislation.
Plans for the Digital Pound Lab are contained in “Progress update: The digital pound and the payments landscape’’, which was published by the BoE yesterday and summarises the work in this area over the past year. It describes the Lab as a “technology sandbox environment’’ for “hands-on experimentation’’, testing potential business models for payment interface providers (PIPs) and external service interface providers (ESIPs) and the potential capabilities of a digital pound.
The digital pound design phase involves assessing the feasibility of a digital pound, creating a proposed model and design and evaluating the costs and benefits and the needs of individuals and businesses when making or receiving payments.
The report states: “Given the technical nature of our current work in the design phase, our focus is presently on engagement with specialist stakeholders whose perspectives and expertise are critical to delivering high-quality technical design work and a robust assessment of a digital pound’s potential.’’
Growing case
A year ago, the Labour Party published a document saying it fully supported the BoE’s work in this area and recognised the “growing case for a state-backed digital pound to protect the integrity and sovereignty of the Bank of England, and the UK’s financial and monetary system’’. Since coming to power in last July’s general election, Labour has committed to continuing the digital pound design phase.
The issue of a digital pound has been under serious discussion for some time. Two years ago, the BoE published the “Digital pound: technology working paper’’ that explored issues including privacy, security, resilience and energy usage. Alongside this, the BoE and Treasury published a consultation paper, ‘Digital pound: a new form of money for households and businesses?’’. A year ago, the BoE released a 33-page “Response to the digital pound technology working paper’’.
Last month the BoE and Massachusetts Institute of Technology (MIT) Digital Currency Initiative (DCI) published a report, “Enhancing the Privacy of a Digital Pound’’, which examined how privacy-enhancing technologies (PETs) could be applied to a digital pound. The report stated that a digital pound could be “at least as private as current forms of digital money and potentially even more private’’ but warned that tensions may emerge over the use of PETs and regulations that require the disclosure of data.
Enthusiasm
For now at least, there is a degree of enthusiasm around the world for CBDCs. Although some countries (such as Canada and Australia) have recently indicated a reluctance to press ahead with creating their own, while others (the Bahamas and Nigeria) have seen limited uptake of theirs after their introduction.
In 2023, the European Central Bank (ECB) began a preparation phase for a digital euro for the 20 European states that use the currency (known as the eurozone), although a decision on whether to actually issue a digital euro is yet to be taken. Every G20 country is exploring the idea of a CBDC and 19 of them are already in an advanced stage, with13 at the pilot stage.
In such circumstances, the creation of a digital pound has to be seen as a realistic option. Yet this may depend on whether the BoE and Treasury can achieve a digital pound system that is innovative enough to entice users. For example, a policy decision will be required on what level of anonymity will be granted. Without widespread usage, a digital pound risks becoming a solution in search of a problem. It may be worth the UK waiting to see how CBDCs fare in larger countries than the Bahamas or Nigeria before fully committing to creating one.
Benefits
There is certainly a strong argument for CBDCs being of benefit to the financial world. As financial services become even more digital, the digital pound could ensure financial inclusion for all demographic groups.
In the UK’s case, having the BoE as an anchor to the CBDC would boost confidence in it. This would not only give a boost to this particular innovation – in the long run, it could encourage further competition in the private sector and even help reduce fees charged to both consumers and merchants. There could also be an increase in efficiency, not only compared to fiat currency but also in relation to cryptocurrencies, which would not be as accessible or as easily liquified.
