The decision over whether to launch a new UK central bank digital currency (CBDC) will be taken by 2025 and if the Bank of England feel it is necessary then it could be launched in some form by the end of the decade, according to the Treasury. This follows a consultation paper that says some form of CBDC is “likely to be needed in the future”.
The so-called Britcoin could include limitations on how it could be traded, how many a single trader could hold and other restrictions when it is first introduced, the paper explains. The decision will be based on developments in money and payment processing between now and the middle of the decade.
This is a controversial time to consider launching any new digital currency, with the sector in the midst of a “crypto winter”, seeing the value of coins slumping and billions wiped from investment portfolios, while allegations of fraud have surrounded the collapse of crypto exchange FTX. CBDCs are a form of stablecoin, a type of cryptocurrency which is backed by an equivalent reserve of traditional assets to ensure its price does not fluctuate dramatically. This is supposed to offer additional security to users.
If introduced the “Britcoin” would be issued by the Bank of England and its value would be linked to the pound, working like paper money issued and controlled by the central bank, it would be interchangeable with cash and bank deposits once fully realised.
Under the plans, consumers would be blocked from holding too many coins due to fears of a run on the banks, with the Governor of the Bank of England Andrew Bailey suggesting this limit could be a few thousand “digital pounds”, as the frictionless nature of a digital currency would make it easier to move wealth instantly between accounts. This could lead to the collapse of some high street banks if they can’t handle the level of withdrawals, the consultation paper warns.
“This would strike a balance between both encouraging use and managing risks, such as the potential for large and rapid outflows from banking deposits into digital pounds. These limits could be amended in the future,” a Treasury spokesperson said.
UK CBDC is a response to the decline in cash usage
The move is in part driven by the decline in cash but a growing need to improve the flow of payments. Its hoped that this will act to knit together different private-sector payment systems, from credit and debit cards to stablecoins produced by other cryptocurrency offerings.
The Bank of England has previously been relatively cold on the idea of CBDCs but Bailey says the case “continues to grow”, as long as all the concerns are met first. He described it as a “profound decision for the country on the way we use money”.
If introduced the Bank of England says it would build on work it already does with reserves, a form of digital currency that allows banks and financial institutions to trade more seamlessly. “If we issued a UK digital currency, it would be in denominations of pounds sterling. For example, £10 of a UK digital currency would always be worth the same as a £10 note,” the bank wrote.
“CBDC is sometimes thought of as equivalent to a digital banknote, although in some respects it may have as much in common with a bank deposit. Any UK CBDC would work alongside – not replace – cash and bank deposits. We will continue to provide cash for as long as the public still want it.”
Bailey said during a presentation on the launch of a consultation paper into the currency idea: “As the world around us and the way we pay for things becomes more digitalised, the case for a digital pound in the future continues to grow. A digital pound would provide a new way to pay, help businesses, maintain trust in money and better protect financial stability.”