What is the digital pound?

Good morning from New Economy Brief. 

Last week, the Bank of England (BoE) responded to a consultation it launched with the Treasury on the possible introduction of a digital version of the pound, or ‘Britcoin’ as it is sometimes known. 

But what is a central bank digital currency (CBDC), and does the UK really need one? As the debate rumbles on, this week we explore the possible risks and benefits of a digital pound.

‍

Central bank digital currencies. The consultation was launched in response to the risk that unregulated digital currencies pose to the financial system. A CBDC would mean households and companies could hold digital money directly with the BoE. Currently, only commercial banks create digital money, while physical cash and coins are created by the BoE. The idea is that a CBDC would be immune to runs like those seen in commercial banks. UCL’s Josh Ryan-Collins wrote a helpful explainer on CBDCs back in 2021, before the BoE launched its latest consultation.

• Is the UK unusual in considering a CBDC? In short, no. The Bahamas, Jamaica and Nigeria have already introduced digital currencies, while over 100 central banks (among them Brazil, China, the eurozone and India) are exploring the possibility of introducing them. 

‍

The debate. In examining a possible digital pound, the House of Lords Economic Affairs Committee concluded that there is “no convincing case for why the UK needs a central bank digital currency (CBDC)”. The committee also identified a “risk of private money creation”. Positive Money’s Simon Youel has criticised the committee’s conclusion, arguing that it did not consider the views of a balanced range of witnesses, with too much weight given to those who'd lose out from “democratising the money and payments system”. He also argued that a CBDC could actually help solve the problem of private money creation (for example, money created by large tech companies), instead providing “universal access to a secure, digital form of public money”. 

• Universal basic income and CBDCs. One benefit of CBDCs is that they could be the key to unlocking Universal Basic Income (UBI), argued Frances Coppola, the author of The Case for People’s Quantitative Easing. As the CBDC would be a ‘stablecoin’ pegged to the country’s official currency, it could be used to pay a UBI directly into citizens’ ‘digital wallets’, she said. This could then be transferred to a personal bank account or used to pay for goods and services directly. Coppola suggested that the central bank could adjust UBI payments up or down to manage inflation. 

A missed opportunity for financial inclusion? Even among supporters of CBDCs, concerns have been raised that if designed incorrectly, a digital pound could risk perpetuating existing problems with the monetary system. During last year’s consultation, several civil society leaders and academics raised concerns that the debate was being dominated by “financial services and tech firms who have vested interests in certain designs of a digital pound”, and was failing to use this opportunity to democratise the money supply. One problem they raised was that many of the proposals being discussed envisage a 'platform' model in which the central bank would hold digital pounds in a ledger, and people would need to use private-sector payments services to get at their money. Campaigners warned that these companies would need to make such a service pay for itself somehow, whether by charging users directly or selling their data. Introducing a CBDC without giving people a free way to access their digital pounds "reinforcing existing barriers to an inclusive payments system", with citizens unable to afford to use the CBDC or being forced to accept having their personal data monetised as the price of doing so.

• A possible solution. The 34 leaders and academics who signed a joint statement on the issue suggested including a free ‘public option’ which would offer “genuinely inclusive access to the digital pound which does not rely on personal data collection or the charging of fees to generate revenue”. They argued that this could be funded through seigniorage - the 'profit' made whenever new money is created - or via "a levy on financial services and payment providers", noting that this could include big tech firms, and that it's essentially how we already pay to give people free access to cash.

‍

Privacy. Another cause for hesitation on digital pounds is the risk to citizens’ privacy. Some more conspiratorial voices are concerned that the very idea of CBDCs is driven by the state’s desire to monitor and control the public. But conspiracy theorists aren’t the only ones worrying. Last year, the House of Commons Treasury committee urged both the Bank and the Treasury to proceed “with caution” while designing a digital pound over concerns about personal privacy. However, Positive Money has pointed out that the state “does not need a CBDC to monitor the transactions of its citizens – banks already share data with security agencies upon request”. It says the privacy of any CBDC depends on whether “high standards of data protection are enforced across the public and private sectors” more generally. In its statement after the recent consultation ended, the BoE said that privacy would be a “core design feature” of a digital pound. 

‍‍

What happens next? The Bank of England has said it is “too early to decide” whether to introduce a digital pound, and that much more preparatory work is needed before the government can consider putting a proposal before Parliament. So while we won't be spending Britcoins in the supermarket any time soon, it's clear that the debate will continue as governments across the globe consider creating digital versions of their currencies.