UK Unveils Proposal for Digital Pound

Following the publication of the future financial framework for crypto assets in the UK, on 7 February a consultation on the possible use cases and design of a Central Bank Digital Currency (CBDC) was launched. Commonly dubbed as the “Digital Pound”, the consultation asks the big question of whether the UK needs a CBDC and if so, how it could be designed. TRM’s policy team has reviewed the consultation and identified the key points to note.  

Background: “To CBDC or not to CBDC?”

Before diving  into the details of the consultation, there is some important background to note regarding  the CBDC conversation in the UK. A discussion of the necessity of a CBDC in the UK has been ongoing for a number of years. Given the UK’s very developed payment and value ecosystem, it is not immediately obvious why the UK would need a CBDC. In 2022 the House of Lords  “struggled to find a convincing retail use case for CBDC’s in the UK.” Specifically, the report on CBDCs found that while there might be “some advantages on speed of settlement and cheaper and faster cross-border payments, it would present significant challenges for financial stability and the protection of privacy.” This “should we or shouldn’t we” debate lays the background  for the consultation.  

‍What do you need to know?

The consultation proposes that “A digital pound would be a retail central bank digital currency (CBDC) – digital money for use by households and businesses for their everyday payments, issued by the central bank, the Bank of England.” 

It argues that given the fall in the use of cash and the potential for an increase in the use of privately issued digital cash (i.e. stablecoins), there will likely be a retail use case for a CBDC in the future. The proposal does not focus on a “‘wholesale CBDC,” which would be used to settle high-value payments between financial firms. 

The government provides a high level summary of their proposals: 

• The digital pound would replicate the role of cash in a digital world, so that it is risk-free, highly trusted and accessible but it does not seek to replace cash in the physical world;
• It would be issued by the Bank of England, widely available and convenient to use, and would differ from stablecoins and cryptoassets which are issued by the private sector;
• The Digital Pound would be subject to rigorous standards of privacy and data protection – neither Government nor the Bank would have access to personal data and holders would have the same level of privacy as a bank account and be subject to the same anti-financial crime controls;
• The digital pound would be accessed through digital wallets offered to consumers by the private sector through smartphones or smartcards, this underscores the public-private partnership which the government would like to base the technology on;
• The CBDC is intended for payments, online, in-store, and to friends and family, rather than savings, with no interest paid on holdings;
• Initial restrictions on how much an individual or businesses could hold are suggested as between £10,000 and20,000.

What are the prevailing themes? 

Accessibility – from the user journey, to financial inclusion – is the prevailing theme of the consultation. In addition to this,  the need to ensure public trust and confidence in a future digital pound is also an important focus.

However, this need for accessibility is balanced with the need to protect privacy and thwart fraud and financial crime. Therefore, much like a bank account, users will need to verify their identity (perhaps using a digital identity) with a “Payment interface provider” before being able to use the Digital Pound. This identification will never be shared with the government or the Bank of England, in order to ensure privacy, and is likely to use privacy enhancing technologies to exchange information securely. 

What comes next? 

The consultation will invite feedback on its 12 questions from the public until June 7, 2023, culminating, within a few years, in a decision on whether or not to issue a CBDC. During this time, the government will develop a “comprehensive architecture for the digital pound…with the private sector” and continue to engage with stakeholders on the necessity of a digital pound. 

As the UK takes this decision it will be looking across the channel at the development of the Digital Euro.