The Bank of England is Planning to Launch a Digital Pound

The “digital pound,” often known as “Bitcoin,” a central bank digital currency (CBDC) for the UK, will “likely” materialize.

A consultation document from the Treasury and the Bank of England makes the case for the establishment of a state-backed digital pound, or CBDC.

The number of persons who routinely use cash has significantly decreased since the outbreak. Digital payments are starting to gain dominance instead. The world of digital payments is still very much in flux, though.

Whether or not the digital pound is actually introduced may depend on how the payments ecosystem develops. A CBDC is being prepared by the Treasury and the Bank of England in response to potential new privately-issued digital money forms that could have an impact on the UK economy.

The next step toward a digital pound is welcomed by Ian Taylor, board advisor at trade association CryptoUK: “This will bring the UK in line with the European Central Bank and a growing number of progressive countries, including many G7 countries, who are exploring the advantages of this payment instrument.

“We look forward to discussing with policymakers and regulators the good effects a UK CBDC could have on financial inclusion, stability, and operational effectiveness in a society that uses less cash. We’ll also search for chances to work together with other organizations, both locally and internationally, and establish connections with other jurisdictions that are creating and implementing their own CBDC solutions.

How would the hypothetical digital pound look?

According to the Bank of England, a digital pound would keep the general public’s access to retail central bank money. It also believes that the CBDC would promote more innovation, variety, and efficiency in domestic payments in the UK.

The new digital fiat currency would have the same value as actual money. A £5 note would be exactly the same value as five pounds of the CBDC. This sets CBDCs apart from other cryptocurrencies since, despite having the same technology at their heart, they claim to be far less volatile.

There would probably initially be a cap on the maximum amount of the digital pound that one person can hold. This is done to monitor the effects of the digital currency and prevent any unwanted consequences. The limit will eventually be changed by the Bank of England; it may be raised or eliminated.

With countries like Singapore, Turkey, Spain, and China already examining the use of CBDCs, Jorge Lesmes, banking director at Tokyo-based NTT DATA, said: “It is surprise to see the Bank of England researching the advantages of digital currencies again.

“The UK has had a CBDC taskforce in place since April 2021. As banks and government bodies look to adapt to an increasingly digital economy, CBDCs offer an opportunity to leverage the benefits of crypto with less inherent risk.

“The key hurdle for the Bank of England to overcome is gaining public acceptance of a new digital currency as some members of the public have understandable fears over cash being phased out entirely. However, the current plans are to maintain digital and physical currencies in tandem. Furthermore, for banking customers, digital currencies could offer them increased freedom in the way they use their money.”

Favourable news for fintechs?

The revelation seems to confirm the government’s decision to keep funding the fintech sector. Despite the fact that a digital currency would promote innovation, fintechs might play a significant role in the UK’s digital currency.

The advantages of a CBDC were discussed by Adam Jackson, director of policy at the organization for the fintech sector, Innovate Finance. “UK ambitions for a digital pound strengthen the UK’s worldwide position for investment in fintech,” Jackson added.

“A CBDC can inspire a new wave of innovation in payments, with the potential to further increase productivity across the economy, provide citizens with new services, and open up access to digital finance, along with UK plans for regulated stablecoins and recognition of smart contracts under UK common law.

“The platform model proposed for the UK lays the groundwork for a varied, competitive, and open market of service providers, which will promote further innovation and draw investment in the UK,” the authors write.

The Treasury’s decision to look at the design of a digital pound is a major moment for the fintech sector and demonstrates the UK government’s real resolve to place technology at the center of our financial services business, according to Chris Ford, head of government affairs EMEA at R3.

“Regulated CBDC, founded on distributed ledger technology, can improve efficiency across our financial system infrastructure and resolve actual issues that have prevented us from progressing for decades.

“It is evident that the government views distributed ledger technology as a key pillar through which it can promote financial innovation in light of last week’s measures to regulate crypto assets. The use of blockchain and similar technologies will be essential in ensuring that the UK maintains its position as a major center for financial services in the face of growing competition from Europe and other regions.

“Policymakers should move forward with prudence”

The future of fintechs appears bright, but there are still uncertainties about how to build the digital pound so that everyone wins.

There are still concerns about how customer data may be utilized and how the government might be able to regulate the digital pound, with some expressing worries about the possibility of reduced cash flow for retail banks.

“Looking ahead, policymakers must proceed with caution. With access to previously untapped data, CBDCs could give governments new, unprecedented levels of control. The potential for governments to make instant policy changes could have negative repercussions on CBDC users – powers that, without sufficient regulation, have the potential to be misused.

Kinesis Money’s chief commercial officer, Jai Bifulco, spoke of the introduction’s potential drawbacks. “The adoption of CBDCs awards governments with a greater level of control over the financial data of the populace,” Bifulco added. Governments all across the world have so far embraced CBDCs. They may also offer them insights based on current economic data, which may have an impact on the adoption of new monetary policies and tax reforms.

“For any new centralised digital monetary system must have concrete, foundational principles around regulation and user privacy built into its design. The system should also be independent, with a focus on bringing economic freedoms and autonomy to its users.

“A better alternative would be a solution that allows citizens to opt out of the flaws and inefficiencies of traditional monetary systems – and opt-in to a government-independent digital asset ecosystem that solves existing monetary problems with the assurance of financial sovereignty.”