The digital pound is right on time to underpin the UK’s transition to a digital economy

The public debate around whether or not Britain should have a digital pound entered a new dimension.

Statements were issued by both the Chancellor of the Exchequer, Jeremy Hunt, and the Governor of the Bank of England, Andrew Bailey, announcing the UK government’s intent to seriously explore the possibilities of implementing a Central Bank Digital Currency or CBDC, for short.

This came alongside the long-awaited arrival of a consultation paper from the Bank entitled: ‘The digital pound: A new form of money for households and businesses?’.

So what does this all mean for UK citizens and the financial system? Access to public money is of fundamental importance to maintaining trust within the UK’s financial system. Public money also represents a fundamental expression of the relationship between a nation and its inhabitants.

Despite the rise of commercial bank money and the corresponding decline in cash usage, cash remains an intrinsic part of the money ecosystem – and millions of UK citizens still depend on using it for many reasons. 

A more radical shift towards greater use of private money – in the form of both commercial bank money, and the emerging paradigm of privately-issued stablecoins – could result in a system where some members of society are left behind due to the focus of the private sector on more commercially advantageous customers.

Ultimately, public money represents the only fully-accessible and inclusive form of money that we have. As physical cash use declines, the case for introducing a digital alternative to publicly issued cash – whilst not necessarily supplanting cash in its entirety – grows ever stronger. 

As a digital form of public money, a CBDC could have significant benefits for the public. It could act as a potential differentiator and accelerator of innovation for the UK globally. Unlike cash, a CBDC could enable micropayments or otherwise be ‘programmed’ for specific uses to support government aims, including macroeconomic and social policy delivery, and to facilitate an improved transactional relationship and experience between individuals, businesses, and the state.

Accessing digital money usually requires no more than a smartphone. This type of technology could bring many of the unbanked or underbanked into the UK’s financial system for the first time – provided, of course, that the role of digital inclusion is fully acknowledged and considered. 

The UK faces a period of great change and new challenges in light of the combined impact of Brexit, the aftermath of the global Covid-19 pandemic, and the ongoing conflict in Ukraine. A nation’s currency is not only its store of value, unit of account and medium of exchange; when deployed strategically, it has the potential to create new economic opportunities.

A well-designed digital pound has the potential to breathe new life into the UK’s currency on the global stage, and the introduction of a sovereign currency that is able to participate fully and actively in digital ecosystems will enable the UK to further build on its economic and social development and growth.

In designing its own CBDC, the UK has an opportunity to play to its strengths – including its desired strategic objectives in a post-Brexit landscape – and to develop a CBDC that can contribute not only to maintaining a position of global leadership, but also to lead the way in standard setting, effective regulation, sustainability and delivery of ESG objectives, for the world of the future. 

The Digital Pound Foundation is committed to supporting the development of a well-designed digital pound. This might be in public form (central bank-issued) or private form (privately issued stablecoins), and most likely a combination of the two.

We need an effective and diverse ecosystem for these new forms of digital money in the UK. A digital pound will form part of the foundational infrastructure that will underpin the UK’s transition to a digital economy, as well as providing a platform for future innovation and leadership on the world stage. 

We welcome the Bank of England’s latest Consultation – The digital pound: a new form of money for households and businesses?  – a paper which proposes a ‘platform model’ for public-private partnership that fundamentally acknowledges the role played by public money – accessible to retail users – in maintaining confidence in the financial system, alongside the role of the private sector in the wider financial services ecosystem that underpins our economy.

Recognising the importance of public trust and confidence in the roll-out of any digital pound, the Bank has also proposed a design and market structure in which, importantly, neither the Bank nor the Government will have visibility of user data, and which does not create a more intrusive system than that associated with cards and accounts today. 

The consultation also makes clear that, whilst the Bank’s objectives do not include preservation of existing commercial bank business models and the design of the CBDC is intended to open up competition and innovation opportunities to a diverse range of market participants, it does nevertheless seek to protect, as always, financial stability in the UK. As such, the imposition of limits on holdings of the CBDC, and a design that precludes the CBDC from bearing interest, are both aimed at creating a CBDC that is primarily useful for transactional purposes. 

The introduction of a digital pound in the form of a UK CBDC will have impacts and repercussions far beyond payments infrastructure.

It will provide a platform for innovation that can support the UK’s transition to a digital economy, it is fundamental infrastructure that can underpin delivery of numerous policy objectives ranging from the Net Zero Target through to more efficient fiscal policy, and it will ultimately enable the UK to maintain a leading edge in an increasingly competitive global financial markets and fintech landscape.

The digital pound is an innovation whose time has come.

*This article originally appeared on the Digital Pound Foundation Blog here.

This article was prepared by the author. The views expressed in this article are the author’s own and do not necessarily reflect the views of the Digital Euro Association.