BoE speaks on digital pound

Sir Jon Cunliffe has spoken on the digital pound, as the BoE and Treasury launched their consultation. He noted that, while no firm decision can be taken on implementing the digital pound, the taskforce is now moving to develop a technical blueprint. It expects this technical and policy development stage to take 2-3 years. during which time it will work closely with private sector partners. It thinks this phase will bring important benefits for both the BoE and the fintech industry regardless of the ultimate decision.

Sir Jon stressed that it is critical that people understand the key differences between central bank digital currencies and cryptoassets such as bitcoin. Most cryptoassets, being unbacked, have no intrinsic value and so are not suitable for general payment purposes, whereas the digital pound would be a safe, trusted means of payment.

He spoke on why the digital pound is likely to be necessary – explaining the two forms of money currently available in the UK – physical cash, and the digital money that private commercial banks transfer in the form of electronic transfers. As time has progressed, the general public has moved from holding over one third of their funds in cash to less than 5%, with only 15% of transactions in 2021 involving physical money.  New digital technologies offer the prospect of new ways to configure money and payments, and non-bank providers increasingly provide innovative payment services. Given the likely further decline of cash, and further development of digitalisation of money and payment, the Government has to conclude that “public” money will become increasingly less useful – so the UK has to address how it can ensure that all types of money used in the UK continue to be denominated in sterling, remain safe and are interchangeable on demand with all other forms of money without loss of value.

Studies also indicate that the future development of private money issuance could become concentrated within a few firms, and that dominant issuers may create systems that create “walled gardens” so that systems are not fully interoperable or could restrict smaller firms in developing payment services using the money issued.

There are also potential benefits of a digital currency in reducing costs and/or speed of payments, and could potentially complement financial exclusion initiatives by allowing offline payments.

He moved on to discuss the proposed model outlined in the consultation, discussing the partnership BoE envisages with the private sector, whereby the BoE would provide the digital pound and the core ledger, and private sector firms could then offer wallets and payment services using the BoE infrastructure. There has not yet been a decision on whether the ledger would use DLT. The wallets would operate on the basis of “passing through” the customer’s instructions to the BoE infrastructure – they would hold all customer information but the central ledger would hold the actual currency. Privacy would broadly be as it is for bank accounts – so that the details of individuals and their transaction records would be known to their providers, but not to the Government or BoE.

The reasoning for proposing an initial limit of between £10,000 and £20,000 is to enable most people to be paid in digital pounds, but would not allow unlimited funds so as to manage financial stability risks.

Finally, Sir Jon discussed also thoughts on how a retail digital pound could sit alongside a wholesale CBDC, privately issued digital money and other jurisdictions’ CBDC. The initial thinking is that, for wholesale transactions, other routes might work better – specifically tokenisation of central bank money. BoE, Treasury and FCA are working on establishing a sandbox to test innovative forms of digital settlement for wholesale transactions, alongside the work on the development of the retail digital pound, and the work on private sector stablecoins foreseen in the FSM Bill.

Emma Radmore