The UK government is pressing ahead with plans to launch its own stablecoin in the form of a “digital pound”. Economic Secretary to the Treasury, Andrew Griffith, told MPs this week that a public consultation would be launched in the near future on the attributes the Central Bank Digital Currency (CBDC) should have.
Griffith told a Treasury select committee hearing on Tuesday that getting the design for the digital pound right was more important than getting it launched quickly as it raises a number of public policy issues. He told MPs: “We have got to get them right. I would rather be right than be first.” It will be a long lead-time activity, he warned, with the first use case likely to be in the settlement of wholesale financial transactions rather than as a retail currency.
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 collapsing and billions wiped from investment portfolios. Despite this, a number of countries are pushing ahead with national CBDC projects.
CBDCs are in development or have already been launched from China to the UAE, CBDCs are in development or have already been launched from China to the UAE, the Bahamas to Nigeria. These trials are designed to create a way to translate fiat currencies into a means of digital exchange and one of the major drivers has been the decline of cash during the Covid-19 pandemic, as people worked from home and ordered online. 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.
The EU is also working on a Digital Euro proposal and is due to publish draft legislation that would make it possible later this year, but Griffith was adamant the plans for the Digital Pound could wait until everything was in place. He said it was likely a privately backed stablecoin will actually beat the Digital Pound to market for handling wholesale financial transactions in the UK due to the complexities involved in launching a CBDC.
‘Not decision yet’ by Bank of England on Digital Pound
The Bank of England would likely take ownership of a Digital Pound and the Bank says it is “looking carefully at how a UK central bank digital currency (CBDC) might work”. The Bank says it has “not yet made the decision to introduce one”.
The proposals for a UK-backed stablecoin are in the “research and exploration” phase, with the outcome designed to help the Bank of England and government work out how it might operate over the next few years. A slow approach is likely due to a lack of widespread take-up in countries that have adopted a CBDC and the ongoing “crypto winter” that has also seen other stablecoins struggle to maintain their value.
Moves to press ahead with the Digital Pound run contrary to the findings of a report last year, which declared a lack of convincing evidence for why the UK needs a retail CBDC. “While a CBDC may provide some advantages, it could present significant challenges for financial stability and the protection of privacy,” said the report from Parliament’s Economic Affairs Committee. This could explain the plan to focus on the wholesale market initially.
The Economic Affairs Committee report added that a digital pound could exacerbate financial instability “during periods of economic stress as people seek to replace bank deposits with CBDC which may be perceived as safer”. Benefits for businesses and consumers would, in the opinion of the witnesses it heard from, be limited.
As well as a consultation on the design of the Digital Pound, the Treasury plans to consult on the wider regulatory approach to crypto assets as part of a bid to make a “world crypto hub”, with Griffith saying the country is a “long way down the road”.
He said UK regulatory rules around cryptocurrency could be broader than those proposed by the EU, which are due to become law in 2024, explaining that UK legislation would likely also cover decentralised finance. “Everyone would benefit from greater transparency,” he said. “We want the right regime, operated in the right way, that has the right balances in it.”