Proposals for a new digital pound

A new digital currency tied to the value of the pound could act as an alternative to cash, according to the Treasury and the Bank of England who have jointly launched a consultation on a central bank digital currency.

The consultation is open for comments until 7 June 2023. 

The new currency (Britcoin?) would be different to a typical cryptoasset such as Bitcoin as it would be tied to the value of the pound, whereas a cryptocurrency's value fluctuates considerably. In that regard, a digital pound is not an alternative to a cryptoasset.

(In a separate development, the Treasury has launched a consultation on a new regulatory regime for crypto trading platforms. The consultation closes on 30 April 2023).

Is a digital pound all about control?

The launch of a central bank currency which can be used by households and businesses for everyday payments in-store and online is driven partly as a reaction to Facebook's 2019 proposal for digital currency (Libra). Although that project has since been halted, the government and the bank are clearly worried about an independent digital currency over which it could exercise little control.

A House of Lords economics committee has previously stated that there was no convincing case for the creation of a digital pound, warning of challenges to financial stability and the protection of people's data.

The Bank of England and the Treasury could regard a central bank currency as being programmable, so for example it could be linked in future to carbon credits as a form of controlling people's expenditure.

Chancellor of the Exchequer, Jeremy Hunt said:

"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’s trusted, accessible and easy to use.

That’s why we want to investigate what is possible first, whilst always making sure we protect financial stability."

What are the proposals?

The proposals are that the new digital pound would be interchangeable with cash and bank deposits.

• It would replicate the role of cash in a digital world
• £10 of a digital pound would always be worth the same as £10 of cash
• It would be issued by the Bank of England and widely available
• Apparently, there will be safeguards to protect personal data and holders would have the same level of privacy as a bank account.  That remains to be seen
• It could be accessed through digital wallets, offered to consumers by the private sector through smartphones or smartcards
• It is intended for payments, online, in-store, and to friends and family, rather than savings, with no interest paid on holdings
• There would be Initial restrictions on how much an individual or a business could hold, possibly around £10,000

The BoE and Treasury are copying other countries who are also looking at similar proposals, including the Eurozone and the US and China.

A decision about whether to introduce a digital pound will be taken around 2025, based on future developments in money and payments. The earliest stage at which the digital pound could be launched would be the second half of the decade.

How might a digital pound work?

• The Bank would provide the central public infrastructure in the form of a ‘core ledger’. Regulated private firms could then use this to design services and handle customer-facing interactions.

• The proposals suggest that like current digital payments and bank accounts, the digital pound would not be anonymous because the ability to identify and verify users is necessary to prevent financial crime.

• Although there is a clear danger of this happening in the future, the Government says neither it or the Bank would program a digital pound or restrict how it was spent.

• Digital wallets could allow people to manage their balance and make payments, in the same way that current contactless payments do. Payments would be confirmed immediately.

• At the initial introduction there would be a limit on how many digital pounds could be held, but this is very likely to be lifted in the future.

Further details

1. Consultation Paper - The digital pound: a new form of money for households and businesses?
2. Further details on the digital pound.
3. Technology Working Paper - digital pound. A Technical Working Paper has been published alongside the Consultation Paper which focuses on the technical requirements and design considerations for the digital pound, and sets out an illustrative technology model that could be applied. It summarises a series of design principles relating to privacy, performance, security, resilience, extensibility, and energy usage that will be applicable to the digital pound. Responses to questions in the Technical Working Paper will be used to gather feedback.