The Digital Pound

One would like to think that given the current high inflation rate in the world's advanced economies that the central banks controlling the monetary levers in these nations would have more important things to contemplate other than the looming imposition of central bank digital currencies but apparently not.  Such is the case with the Bank of England as you will see in this posting which updates the Bank's stance on CBDCs.

 

Here is the title page from a recent Consultation Paper from the Bank of England:

 

The paper opens by noting that banknotes are being used less frequently thanks to new technologies that are allowing for the development and use of new forms of digital money and new transactional devices.  To remain competitive, the UK government and the Bank of England state that the UK should remain at the forefront of innovation in payments, money and financial services and, as part of this effort, a central bank digital currency or "digital pound" would be implemented as a new form of digital money that would be used by households and businesses for their everyday payment needs.

 

Here is a graphic showing how cash payments have declined over the past decade:

 

 

In 2021, card payments accounted for nearly 60 percent of UK payment and 32 percent of payments were contactless compared to only 15 percent of payments that were made using cash.  Nearly one-third of retail sales were made online and 90 percent of UK adults own a smartphone, a necessary technology for the implementation of a digital payments ecosystem.  On the other hand, around 1.2 million UK adults do not have a bank account and 20 percent of people state that cash is their preferred form of payment.  The Bank of England states that there is a downside to this fragmentation of the payments system (my bolds throughout):

 

"If current trends continue, the public’s access to, or use of, central bank money (i.e. banknotes) will diminish and the monetary system could become fragmented, posing a risk to monetary and financial stability. The payments landscape could also become concentrated if firms’ use of new technologies in money issuance results in dominance by a small number of them. That would pose a risk to competition and diminish the incentives for longer-term innovation.

 

Considering these payment trends, we judge there is likely to be a benefit from the Bank issuing a digital form of retail central bank money. It would support the safety and interchangeability of money, as well as encourage choice, competition and innovation. The digital pound would complement banknotes and ensure that the Bank continues to provide money that is relevant to the way people choose to pay, both today and in the future. It would also coexist with and complement both existing and new forms of private digital money."

I would say that the greatest threat to financial stability is the very existence of central banks but, then again, my tinfoil hat is slightly tight today.

 

Here's another quote from the paper:

 

"As part of the wider landscape of money and payments it  (a digital pound) would sit alongside, not replace, cash – a digital counterpart to familiar, trusted banknotes and coins, subject to rigorous standards of privacy and data protection."

At least until they decide that banknote payments are just too difficult to track, right?

  

Here is the Bank of England's proposal:

 

"The Bank of England and HM Treasury judge it likely that a digital pound will be needed in the future. It is too early to decide whether to build the infrastructure for one, but we are convinced the next stage of preparatory work is justified.

 

A digital pound would be a retail central bank digital currency (CBDC) – digital money for use by households and businesses for their everyday payments, issued by the central bank, the Bank of England. The Bank of England (the Bank) and His Majesty’s Treasury (HM Treasury) plan to accelerate our work on the technology and policy architecture for a digital pound....

 

At this stage, we judge that it is likely that the digital pound will be needed in the future and that it would offer benefits. As set out in more detail in Part B, the digital pound would maintain public access to retail central bank money, thereby anchoring trust in the monetary system in a more digitalised world and underpinning monetary and financial stability. Also, as our lifestyles and the economy become ever more digital, it would, through partnership with the private sector, promote innovation, choice and efficiency in domestic payments, thereby boosting the UK economy, supporting growth and financial inclusion."

 

It pretty much sounds like a digital pound is a "done deal", doesn't it? 

 

Here is its model for the public-private partnership that would be required to development and issue the digital pound:

 

The bank claims the following:

 

"The Bank would issue the digital pound. This means it would be a direct claim on the Bank, as cash is today. It would be denominated in sterling, the currency of the UK, and £10 of digital pounds would always have the same value as, and be interchangeable with, a £10 banknote.

 

The Bank would provide the digital pound and the central infrastructure, including the ‘core ledger’. Private sector companies – which could be banks or approved non-bank firms – would be able to integrate into the central digital pound infrastructure and provide the interface between the Bank and users. They would do this by offering digital ‘pass-through’ wallets to end users. The wallets could be integrated into their other services. They are known as ‘pass-through’ wallets (hereafter referred to simply as ‘wallets’) because the user’sholdings of digital pounds are recorded anonymously on the Bank’s core ledger, in order to safeguard their privacy, and the wallet simply passes instructions from the user to the core ledger. End-users would interact with these wallets rather than directly with the Bank."

 

I noticed that the Bank emphasizes "privacy", in fact, protection of individual privacy is mentioned 49 times in the paper and, they even claim that a digital pound would be more private than the current system in some ways as quoted here:

 

"A digital pound would have the same (or stronger) privacy protections as bank accounts, debit cards or cheques. Individuals’ personal details would be known to their private sector wallet provider in the same way they are for bank account providers today (and subject to the same privacy protections). But individuals’ personal details would not be known by the Government or the Bank of England.

 

By providing the same privacy as most of the money we use, the digital pound would be designed to protect against fraud and counterfeiting, while not facilitating financial crime."

 

More private....until it isn't.  Just ask Canada's bank account-seizing Minister of Finance Chrystia Freeland how private Canadians' financial services are today.

 

Given all of this background information, what lies ahead in the planning process for the digital pound?  Here is a graphic showing the roadmap to a digital pound:

 

 

Phase 1 Research and Exploration Phases: The Bank and HM Treasury consider a digital pound is likely to be needed in the UK though no decision to introduce one can be taken at this stage. We will therefore step up development and move to the next stage of our work.

 

This Consultation Paper, and the Bank’s accompanying Technology Working Paper are the conclusion of the ‘research and exploration’ phase of our work on the digital pound – Phase 1 of our digital pound roadmap.

  

Phase 2 Design Phase: We will now move to Phase 2, to develop further, in both technology and policy terms, the model for the digital pound...upon which we are consulting.

 

This work in Phase 2, the ‘design’ phase, will enable us to respond to developments in the payments landscape and materially reduce the lead time if there is a future decision to introduce a digital pound in the future. It will involve investment in the Bank’s technology capabilities, and an ambitious approach to the technology roadmap and collaboration with the private sector.

 

By the end of the design phase, the bank will have evaluated the technological feasibility of a digital pound, optimized its design and technological architecture as well as:

 

1.) Cut lead-times on development and equip ourselves with the knowledge and capabilities to move into a ‘build’ phase, should there be a decision to introduce a digital pound.

 

2.) Determine the technological feasibility and investment needed to build a digital pound.

 

3.) Articulate, in detail, what the technology and operational architecture for a digital pound would look like.

 

4.) Assess and evaluate the benefits and costs of the digital pound architecture.

 

5.) Deepen the Bank’s knowledge of CBDC technology and the private sector’s understanding of our technology approach.

 

6.) Support the development of the broader UK digital currency technology industry through experimentation and proofs of concept.

 

7.) Provide the basis for a future decision on whether to introduce a digital pound and move to a ‘build’ phase.

 

The decision on whether to proceed with a digital pound will be made after the design phase is completed.  If the decision is made to proceed, a prototype digital pound will be developed first and will be used in a simulated environment before moving to live pilot tests.

 

Here are the key sentences in the document:

 

"A decision on whether or not to proceed to a build phase would be made at the end of the design phase, around the middle of the decade. This work will shorten the lead time for the introduction of a digital pound, which would be in the second half of the decade."

 

In other words, we'll have at least one central bank digital currency sometime between 2025 and 2030.

 

Let's close with these thoughts.  Despite what the Consultation Paper says, I think that we can pretty much assure ourselves that the Bank of England has every intention of issuing a digital pound.  While the Bank's CBDC will, at first, "circulate" alongside physical banknotes, given the societal evolution toward a more intrusive and universal surveillance/control state, I'm also postulating that physical banknotes which provide a modicum of transactional privacy will completely disappear sooner rather than later as the powers that be implement programable digital currencies as a key part of their societal control mechanisms.