What is the digital pound and when can you expect it

The Bank of England has announced plans for digital pound. Deputy governor Jon Cunliffe gave a speech on Tuesday updating the finance industry about the plans for a central bank digital currency (CBDC). Yahoo Finance unpacks what a digital pound is, and when UK citizens can expect to be using this new form of money.

The UK’s central bank digital currency, or digital pound – also dubbed as ‘Britcoin’ – has been in development since June 2021 and could be launched “later this decade,” according to the Bank of England.

A CBDC is digital money, but unlike bitcoin (BTC-USD) or ethereum (ETH-USD), it is not decentralised, where payment information is held by thousands of computers worldwide.

Instead a CBDC is created, held and issued by a central bank, and in the case of the UK, this means the Bank of England.

CBDCs come in two forms; wholesale CBDCs that are used for payment processing between central banks and retail banks, and retail CBDCs that are used between central banks and normal individuals.

The UK Treasury has described a digital pound as being “a new form of digital money for use by households and businesses for their everyday payments needs”.

In a consultation paper about a UK digital pound launched on Tuesday the Treasury added: “As part of the wider landscape of money and payments it would sit alongside, not replace, cash – a digital counterpart to familiar, trusted banknotes and coins, subject to rigorous standards of privacy and data protection.

“This is in line with our ambition that public trust in money remains high, and that modern forms of money and payments meet the evolving needs of individuals and businesses.”

The Treasury’s document went on to distinguish a digital pound from cryptocurrencies.

“Unlike crypto assets and stable coins, the digital pound would be a central bank digital currency – sterling currency issued by the Bank of England and not the private sector.”

Cunliffe said in Tuesday’s speech that the UK’s digital pound ‘Taskforce’ was currently not at a point where a firm decision can be made to implement this new form of money. However he added that a digital pound would be needed by the UK by the end of this decade.

“The Bank and The Treasury, will now proceed to the next stage of detailed policy and technical development of the digital pound – including the development of a technical blueprint.” He said this would take three years.

Cunliffe then stated that if the BoE and the UK Treasury proceed with plans for a digital pound, Britons would be restricted to holding a maximum of £20,000 of the new digital currency.

“We propose a limit of between £10,000 and £20,000 per individual as the appropriate balance between managing risks and supporting wide usability of the digital pound.

“A limit of £10,000 would mean that three quarters of people could receive their pay in digital pounds, while a £20,000 limit would allow almost everyone to receive their pay in digital pounds, keeping outflows from the banking system broadly within the assumptions set out in the Bank’s earlier modelling work.”

His speech coincided with the commencement of the UK Treasury’s consultation which will last for about four months, and will be followed by a ‘digital pound’ design phase lasting until approximately 2025. Following this design phase, there will then be a final decision on whether a Bank of England CBDC is released to the public.

The roll-out of a digital pound, or any central bank issued CBDC is a controversial subject. Below is a list of the pros and cons, what it means for individuals living in the UK, and for the UK’s position in the world’s economy as a whole.

Pros

Improved financial inclusion: A digital pound could could make it easier for people who are unbanked or underbanked to gain access to financial services. This would be via a direct digital wallet created by the Bank of England.
Increased efficiency: Issuing a digital pound, for such things as universal credits payments, would vastly reduce the costs and time associated with traditional banking transactions.
Improved monetary policy: A digital pound could make it easier for the Bank of England to implement monetary policy, as they can directly control the supply of money in circulation.

Cons

Cybersecurity risks: A digital pound managed by a single point of failure, in the UK’s case through the Bank of England, could increase the risk of cyberattacks and financial fraud.
Privacy concerns: A digital pound could compromise the privacy of individuals by allowing central banks to track their transactions. However, the UK’s digital pound project has stated that it will have the same level of user privacy associated with the traditional banking system.
Disruption of the traditional banking system: The roll-out of a digital pound could displace intermediary banks and other financial institutions, leading to job losses and a reduction in financial services.
Programmable money: A digital pound, much like any other central bank digital currency, could be programmed to give government control over where, when and on what their populace spend their money on. This has caused concern for advocated of financial liberty. However, the UK Treasury document states that the digital pound would not have such programmable applications factored into its design.

How it will impact UK’s position within the global economy

Increased economic stability: A digital pound could increase economic stability by reducing the risk of financial crisis by offering greater monetary control for the Bank of England.
Improved cross-border transactions: A digital pound would allow for faster cross-border transactions, that are also cheaper, and more efficient. Cunliffe directly refers to this in Tuesday’s speech when he said that a digital pound could complement existing financial inclusion initiatives, such as helping people make payments offline or improve cross-border payments.
Increased financial innovation: A digital pound could drive innovation in the UK’s financial sector, leading to new and improved financial products and services.

Disruptive effect on traditional financial institutions: CBDCs in general could have the potential to disrupt traditional financial institutions such as banks and payment service providers, which could lead to a shift in the balance of power in the financial sector.
Political and regulatory risks: A digital pound could face challenges related to international harmonisation with other regulatory bodies, which could pose risks to their widespread adoption. Finance is sometimes resistant to change and uptake of this new system might face a considerable amount of inertia.

Watch: Fireblocks director and former fintech head of Bank of England talks about CBDCs and stablecoin

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