According to plans by the Treasury and the Bank of England, the UK could launch a digital currency known as Britcoin within the next ten years. After assessing the rise of cryptocurrency issuance, the UK government has launched a four-month public consultation process.
A currency backed by the central bank would be “robust and retain its value over time,” unlike cryptocurrencies, which can fluctuate wildly and jeopardize investors’ assets, according to the Bank of England’s website.
The possibility of a digital pound is driven by the development of stablecoins, which are comparable to crypto assets but pegged to the value of existing currencies such as Bitcoin or the US dollar.
According to the Atlantic Council, more than 100 countries are thinking about using a digital currency issued by central banks. Following Indonesia’s work on a prototype digital rupiah and Ghana’s e-cedi pilot program, Sweden plans to issue a digital krona. Eleven countries, including Jamaica and the Bahamas, have already implemented central bank digital currencies.
The Bank of England is concerned that new forms of monetary value like digital coins could weaken its control over the financial system and undermine its ability to manage the economy. From their perspective, a digital pound sterling could improve the payment system by allowing businesses and consumers to make faster, cheaper and more programmable transactions. Micropayments for services could be made possible through a less expensive, more automated payment system, opening up new business models.
The proposed digital currency will be denominated in pounds sterling at a ratio of 1 to 1. The currency held in the digital wallet could be used to make electronic payments for goods and services. Proponents of central bank digital currencies believe that they make digital transactions easier and less expensive, and increase access to the financial system by allowing those without bank accounts to use them.
Benefits of cryptocurrency
One of the new trends that has linked cryptocurrencies to the mainstream financial sector is central bank interest in the phenomenon, for both positive and negative reasons.
Speaking to Private Banker International, Ian Taylor, head of crypto and digital assets at KPMG UK, says: “In an increasing digital society, the UK needs to keep pace with the speed of innovation that’s happening in the payments sector. The Bank of England’s consultation into a proposed CBDC is a sensible approach to keep the UK at the forefront of technological change without committing yet to the substantial investment that would be needed to roll out a digital pound.’’
Peter Harmston, Partner, and UK head of payments at KPMG UK, adds: “The benefits and challenges of introducing a digital pound need to be carefully considered. There are a number of factors that need to be taken into account including the fine balance between the inevitable decline in physical cash, the importance of ensuring as an economy we are being financially inclusive and the current lack of consumer protection in the digital assets market.”
In the context of combating money laundering and the financing of criminal activities, central banks and other regulators have expressed concerns about the anonymity of cryptocurrency use. Despite the concerns, do banks believe cryptocurrency is trustworthy?
“Not all crypto assets are the same. Unbacked assets are highly volatile, and their value can drop to zero. Even some stable coins have dropped to zero. That said some asset backed, fiat backed, and algorithmic or decentralised currencies have maintained their peg during highly stressed periods. Finally, as many of the activities and entities will shortly fall into the regulated perimeter, this will lend some levels of credibility to what in the end is only technology,” Taylor clarifies.
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Even though it is expected to provide the necessary infrastructure for the digital pound, the Bank of England does not indicate that it will interact directly with customers. Instead, people will store their Britcoin in wallets provided by financial intermediaries that also store their data; neither the bank nor the government will have access to these wallets.p>
While the Bank of England is not claiming that Britcoin will replace cash, it is certainly another step towards the digitalization of banking, potentially excluding those who are less tech-savvy. Authorities are very interested in the project for several reasons. As the digital revolution progresses and countries compete with each other for market share in a growing technology sector (including fintech), governments and central banks want to be seen as innovative.
Another reason for the interest is a more practical approach. The use of cash has declined sharply in recent years, and this process accelerated further during the COVID 19 crisis due to the handling of banknotes and coins. Nevertheless, it is important for the financial system to provide a means of payment that is accessible to all.
