CBDC Explained: When will the UK launch a digital pound?

In February, the Bank of England and the Treasury confirmed that they were looking at introducing a digital currency.

“While cash is here to stay, a digital pound issued and backed by the Bank of England could be a new way to pay that’s trusted, accessible and easy to use,” said Chancellor Jeremy Hunt.

So what would a digital pound look like, and could it be launched anytime soon?

A Central Bank Digital Currency (CBDC) is money which is issued by a country’s central bank and used for everyday purchases. It differs from currency in circulation because it isn’t physically issued through coins and notes. Instead, as the name suggests, it’s offered digitally on an electronic device like a computer.

However, to keep its value stable, it would be redeemable for cash. Therefore, one digital pound will have the same value as a solid pound coin.

The Bank of England refers to the UK’s CBDC as the digital pound. But you might find other people refer to it as Britcoin. 

While the Bank of England and the Treasury are in discussions over launching a new digital currency, there are no firm plans to introduce it into the economy yet.  

No, the BoE would use it alongside cash. This is because a large amount of people still use cash in everyday life. 

A CBDC is not to be confused with cryptocurrency.

Cryptocurrencies, which include the likes of Bitcoin, are decentralised currencies. It means they aren’t backed or influenced by a country’s central bank. So, if the cryptocurrency collapses, then an institution like the Bank of England won’t step in to resolve the situation.

And this could happen because a lot of cryptocurrencies aren’t backed by a tangible asset. Instead, their value is largely dependant on supply and demand, which can lead to extreme volatility.

Alternatively, if the digital pound looks unstable then it is the Bank of England’s job to try and protect its value.  

Bitcoin is one cryptocurrency which uses blockchain technology, a public ledger which records all its transactions.

Whether a CBDC employs a similar technology remains to be seen.   

Many consumers are already enjoying the benefits of a digital currency by making day-to-day spending on their debit and credit cards. The slight changes we could face depends on the technology used to facilitate our digital pound transactions.

The Bank of England has already said that to host a CBDC the private sector would need to create a digital wallet to store the currency. So, the innovation used to create these wallets could bring about subtle changes.

For example, in 2017 South Korea ran a trial where people received change from cash purchases onto a prepaid card. If a similar system is implemented in the UK, it means you could buy your lunch at the train station with a crisp note and opt for the change to be stored directly into your digital pound wallet. This eliminates the potential build up of loose change which we may be tempted to part with quicker.

Otherwise, storing the digital pound on a new system could also make payments faster and less expensive. This is perhaps illustrated in the use of micropayments. According to the Digital Pound Foundation, you could use your digital pounds to fund your favourite music streaming service on a pay per play basis. Your favourite artist will then earn immediate royalties through a digital currency rather than waiting for the streaming service to make a once-off bulk payment.

The effects of a CBDC would also be felt by policymakers who help run the economy, like the Bank of England’s Monetary Policy Committee which sets the country’s interest rates.

If a digital pound is launched and directly available through a wallet, then the MPC will need to consider how its interest rate decisions will filter through to the digital currency.

Currently, the BoE said that you won’t be able to earn interest off the digital pound as it is designed for spending. In addition, each person will be limited to a set number of digital pounds.

This will likely come as a relief for retail banks, which we currently use for access to savings and mortgage products. A lot of retail banks rely on the money people deposit through savings and current account products. This is then used as other forms of lending such as mortgages and overdrafts.

If people then start moving all their money into a digital wallet, then these retail banks could be forced to rethink how they receive money.