Will a digital Pound - the UK's own CBDC - ever happen?
THE idea of a digital pound (a so-called “Britcoin”) caught the public’s imagination when the Treasury and Bank of England consulted on it in early 2023, with the consultation receiving over 50,000 responses.
Since then, the Bank of England has continued work on the design phase of the digital pound, but no decision has been made to launch it. The Bank has said that the decision on whether to do so will be taken only once the design phase has been completed, considering the payments landscape at the time.
Recent news reports suggest that the Bank views the case for the digital pound as “not proven”, with Governor Andrew Bailey reportedly stating there was, as yet, no “must-have” reason to launch the product. His view is that justifying the creation of a digital pound would require it to provide benefits that commercial alternatives could not.
Elsewhere, many countries, including Canada, Japan and Singapore, are either also working on developing a central bank digital currency (CBDC) or participating in CBDC pilot projects. The European Central Bank is also exploring launching a digital Euro, saying that a digital Euro “would support Europe’s strategic autonomy and monetary sovereignty, making our payments landscape more competitive and resilient to non-European payment providers”.
The US has taken a different turn. The Trump Administration’s January 23 Executive Order on financial technology banned the establishment, issuance, circulation, and use of a CBDC within US jurisdiction. It cited the threat of these currencies to the stability of the financial system, individual privacy, and sovereignty of the US as reasons for the ban.
In which direction will the UK jump on this? It really is too early to say, but there are a lot of issues to consider, and some reasons to be sceptical that the Bank’s current caution gives a reliable steer to future policy.
The first relates to something called the “singleness of money” – this is the idea that all different forms of money, including central bank money and private money (commercial bank deposits and stablecoins) must be exchangeable with each other at par value and at all times. The Bank of England has said that the design, operation, and supervision of retail payment systems must support this. The implication is that if commercial alternatives cannot adequately support one-to-one exchange at par, then a digital pound may be needed.
The most successful commercial alternatives to CBDCs are the stablecoins such as USDC, USDT and EURC, which have become essential elements in on-chain payments. But unlike electronic money, current stablecoins typically can fluctuate in value against the underlying currency. They of course employ various measures to maintain a stable value against the underlying currency, but there is no guarantee of this; nor is there any equivalent to the kind of state-backed deposit protection that applies to bank deposits.
The UK is still working on its long-term regulatory regime for stablecoins, but if the Bank determined that UK regulated sterling stablecoins did not meet the “singleness of money” standard, then one wonders where the commercial alternatives may come from. So far, there has been less noticeable commercial activity relating to commercial bank digital deposits, which plainly would meet the singleness of money standard, than stablecoins.
Is the digital pound caught in a sequencing loop, where the possibility of a digital pound discourages commercial bank investment in digital deposits, but commercial digital deposits are required to avoid the need for a digital pound.
The other issue relates to UK monetary sovereignty. Recent geo-political events are leading the UK and other European countries to re-examine their strategic independence. Such actions may not be limited to military defence but may also extend to the resilience of critical payment systems.
In this new world, one can imagine the UK issuing the digital pound not to address commercial market failure, but as a means to ensure UK resilience to non-UK payment providers and systems. The ECB is looking at the digital euro in this way, but the US approach can also be seen as having geo-political objectives.
The possibility of the UK launching a digital pound should not be discounted just yet.
Brett Hillis, Partner, Reed Smith
