The Bank of England (BoE) and the Treasury are convinced that a central bank digital currency (CBDC) is becoming increasingly necessary.
“On the basis of our work to date, the Bank of England and HM Treasury judge that it is likely a digital pound will be needed in the future,” said Andrew Bailey, governor of BoE in a report.
Deputy governor of BoE, John Cunliffe, said a ‘digital pound’ would be needed to maintain trust in the UK’s monetary system while he set out limits for its use to preserve financial stability. Speaking at UK Finance, Cunliffe said the Bank could not ignore the possibility that the use of cash would become increasingly irrelevant while “new forms of money” would become more and more prominent, threatening trust in the monetary system.
These developments made it likely the UK would need a digital pound to perform the “anchor function” that cash has performed in the past. Cunliffe also outlined the Bank’s response to concerns that the introduction of the ‘digital pound’ could affect financial stability. The Bank is likely to propose a temporary limit on ‘digital pound’ holdings of between £10,000 and £20,000 he confirmed.
“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.” Admitting that the Bank could be wrong, Cunliffe stressed that it was taking a forward-looking approach. “We don’t always want to be five years away from this” given how quickly things have changed in other spheres, he said.
Firms in the financial district of London (known as the ‘City’) may face a cap on how much ‘Britcoin’ they can hold, as the BoE pushes forward with a potential digital pound. Holdings of a central bank digital currency would be capped for both businesses and individuals – at least in the introductory phase – according to a consultation on 6 February.
“While cash is here to stay, a digital pound issued and backed by the Bank of England could be a new way to pay that is trusted, accessible and easy to use,” Chancellor Jeremy Hunt said. “That’s why we want to investigate what is possible first, whilst always making sure we protect financial stability.” However, a working Britcoin is still a while away. The BoE and Treasury said that a decision would likely come around the middle of the decade. Only a small number of countries have so far launched a CBDC, most notably China.
Despite historically being sceptical of the idea, the US Federal Reserve is experimenting with a potential digital dollar and launched its own discussion paper last May. The European Union is also exploring a digital euro.
The consultation on 6 February said the digital pound would be “risk free, highly trusted and accessible” and “subject to rigorous standards of privacy and data protection – neither the government nor the central bank would have access to personal data and holders would have the same level of privacy as a bank account.” BoE has been laying the ground for a possible Britcoin for several years now. City leaders queued up to join the engagement and technology forums the BoE set up in 2021, with more than 200 applications for the chance to sit alongside representatives of technology giants including Google and Visa, revealed at the time.
The likes of Morgan Stanley Emea chief operating officer Arun Kohli, HSBC co-CEO of global banking and markets Georges Elhedery and Standard Chartered group head of conduct Tracey McDermott won slots and helped to shape the debate. (The writer is our foreign correspondent based in the UK)
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