In a world where cash may soon be a distant memory the digital pound could be in your virtual pocket by 2025. No small change

Many central banks are considering options for the creation of their own digital currency. And unlike cryptocurrencies which are issued privately, a central bank digital currency (CBDC)  would be the digital equivalent of cash and coins. 

A digital token issued by a central bank, pegged to the value of the issuing country’s fiat currency, whether pound sterling, euros or the US dollar. CBDCs are an entirely digital representation of the currency of the country that issues it. 

The Bank of England (BoE), the European Central Bank and many others have followed this international trend. In the UK, this has led to the creation of a joint CBDC taskforce between the BoE and HM Treasury designed to “co-ordinate the exploration of a potential UK CBDC”. 

Since its establishment in April 2021, the taskforce’s discussions have led to a formal public consultation, with the BoE publishing in February 2023 two papers on the matter. 

The consultation on those papers closed at the end of June 2023 – apparently receiving 50,000 responses before doing so.

Why create a digital pound?

The UK’s version of a CBDC – the digital pound – would “be a new type of money issued by the Bank of England for everyone to use for day-to-day spending”, according to the BoE. “You would be able to use it in-store or online to make payments… [the] digital pound would be denominated in sterling and its value would be stable, just like banknotes,” the BoE has said. 

The BoE has also given the assurance that “£10 in digital pounds would always have the same value as a £10 banknote”. Although it says the digital pound’s introduction is likely, it won’t likely be until 2025 at the earliest. 

In outlining use cases for the digital pound, the BoE has so far focussed on the benefits to retail payments. It has said that it is “likely that a digital pound will be needed in the future” in response to the way money and payments are changing. 

What would it be like?

If a digital pound were to be issued today, you would probably need to open a digital wallet with a private company; for example, a fintech business or a bank that offers digital wallets. You would not be able to hold digital pounds in your current account – it would need to be held separately.

You would then deposit the equivalent value of some of the money sitting in your current or other payment account into your digital wallet for it to be converted into digital pounds and would subsequently be able to use those digital pounds to purchase goods such as your morning cappuccino. 

Much like you may do now, you would tap your card or smartphone and pay for that coffee – except the payment would be made in digital pounds rather than money from your current account. 

Indeed, whether paying for your coffee via a smartphone or transferring digital pounds to pay the electrician, other than potentially a quicker settlement of your payment, you would probably notice little to no difference to your payment experience. 

Which begs the question: what problem is the digital pound trying to fix? Lord King (the former Governor of the BoE) has said of the digital pound that it is a “solution without a problem”. In respect of retail uses, he may have a point. 

Whilst it could bring some benefits to retail payments, it is difficult to see how they are not limited to mostly marginal user efficiencies. 

Concerns for digital pound holders

Under current proposals an individual would be able to hold between £10,000 and £20,000 in digital pounds. Yet no interest would be earned on digital pounds held in your digital wallet. 

As it stands, you wouldn’t be able to put digital pounds in an ISA or personal saving accounts. It seems undesirable to allow for up to £10,000 to £20,000 of consumer money to be sitting in non-interest-bearing accounts. 

Aside from the questions about whether there is a use case, there is some debate over the introduction of a digital pound surrounding privacy. 

All transactions using digital pounds will need to be recorded in some way – much like in any other payment ecosystem. 

To address privacy concerns, the BoE is advocating the creation of an anonymised core ledger for recording CBDC transactions and has indicated that it would also introduce other privacy enhancing techniques. 

However, there remain concerns that having a payment ledger in the hands of BoE could allow the Government to more readily monitor and control participants transactions. 

Financial stability has also been raised as an area of concern. In times of economic uncertainty, the digital pound could become a haven owing to the fact it should be immune from a bank run (there is no cash for the bank to run out of). 

But it is plausible that, if everyone starts moving their money into digital pounds, this may cause a run on traditional banks and create or further exacerbate economic problems. This is in part why the BoE has suggested a limit of between £10,000 and £20,000. 

However, a limit between £10,000 and £20,000 is not an insignificant amount to allow people to withdraw and transfer their money into digital pounds. There is perhaps more thinking for the BoE to do on this front.

Whilst cash use may be reducing in the UK, there are some in our society who are heavily reliant on using cash as a method of payment. 

And while the BoE is not suggesting that (should it happen) the introduction of the digital pound would replace cash, rather complementing it, the digital pound’s introduction could have marginalising effects. 

Let’s say for example that shops such as supermarkets or pharmacies start only accepting payments in digital pounds because of the cost benefits of not having to deal with cash. This could leave people unable to purchase key everyday goods. 

Wholesale CBDC

There may be more of an argument for the benefits of the digital pound for wholesale payments – instruments which enable transfers between banks. The use of digital pounds could provide faster settlement of wholesale payment activities, decreasing settlement times and provide better settlement finality. 

Other wholesale payment benefits to a digital pound may come through its programmability and its potential interplay with smart contracts. 

A programmable wholesale digital pound could include built-in rules which may impose restrictions on how money is used, and one that interoperates with smart contracts, could enable transfers and other activities with money to take place automatically when certain conditions are met. 

The BoE is wary of enabling financial institutions from settling high-value wholesale transactions in digital pounds though, “given the disruptive impact this could have on core financial markets”. 

However, it is considering establishing a new wholesale central bank digital currency platform to support wholesale settlement in the long-term. 

The Bank already provides central bank money in electronic form for wholesale settlement through its Real-Time Gross Settlement (RTGS) service, and it has committed to delivering an improved RTGS service in 2024.

International impact

Whatever the use case arguments are in respect of introducing a digital pound for retail and wholesale payments, we should not overlook the need for one to ensure the UK stays relevant within the global economy. CBDCs may have a significant role in enabling faster, cheaper cross-border payments. 

In June this year, the International Monetary Fund noted the developments that have taken place in the Bahamas, Jamaica and Brazil. Nigeria is already using a CBDC, and there are reports of many other countries with major economies working toward introducing them, including China and India.

While the current case for the digital pound is unclear, this is not to say that there is no benefit to its creation. The need for the UK to stay relevant in global markets by adapting the usefulness of its currency for the purposes of cross-border business should not be underestimated. 

However, perhaps the BoE has more work to do to better articulate and persuade people in the UK for the need for it. l

Luke Scanlon is Pinsent Masons’ Head of Fintech Propositions; Tom Aries is an associate at the firm.

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