The Treasury and the Bank of England (BoE) have suggested an increased likelihood of a state-backed digital pound in the second half of this decade, as a new “trusted and accessible” method of payment in the digital age for use by households and businesses for everyday payments.
However, the earliest we may see this digital currency is 2025, with Hunt stating; “We want to investigate what is possible first, whilst always making sure we protect financial stability.”
On 7th February 2023, a formal consultation was started by the Treasury and the BoE, drawing upon assessments of the case for a retail central bank digital currency (CBDC) and detailing how the e-currency would be held in digital ‘wallets’ by banks.
As part of their preparatory work, the parties have insisted that the currency would not be a replacement of current money, but work alongside and be interchangeable with cash and bank deposits.
Cryptocurrencies are not backed by a central bank and therefore can be volatile, whereas the digital pound is likely to maintain the value of The Pound.
Reassurance that the public, experts, and organisations are at the heart of future digital financial decisions has been stated, with stakeholders being urged to respond to the Consultation by 7th June 2023, to ensure nationwide value alignment.
If approved, the currency would need a significant investment to launch, and initially there is likely to be limitations on the amount of digital currency Britons would be able to hold in their ‘wallet’.
Cunliffe detailed how a spending cap between £10,000 – £20,000 would be placed on users, to avoid the exploitation of the e-money system as a form of wealth storage.
The parties insist introduction of the digital pound is necessary to preserve future financial stability and also promote; “innovation, choice, and efficiency in payments.”
Laith Khalaf, Head of Investment Analysis at AJ Bell commented on the reduction in payment fees; “If a digital pound can streamline the payments infrastructure behind card payments, the fees merchants are charged could come down, making it easier and cheaper for them to process small payments.”
However, the sophisticated technology behind these types of currencies have ensued worries about financial control. CBDCs can be programmed to control consumer spending. China’s digital Yuan prototype has been developed with expiration dates of use, meaning consumers lose their money if they do not spend within the programmed timeframe.
Abilities to dictate purchase decisions and track and monitor spending would also be feasible through a central digital currency.
The main concerns arise from ensuring adequate consumer protection, as digital wallets hosted through third parties such as technology companies and crypto players, spark risk of vulnerability amid the ever-increasing threat and sophistication of cyber criminals.
For now, a technical blueprint will be constructed by the parties, with feedback from the consultation aiding the proposed development, with key focus on consumer and financial protection.