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What You Need To Know About A Bank Of England Digital Currency


6 min read

Like many major economies including the EU, US and China, the UK government and the Bank of England have been formally exploring what a Central Bank Digital Currency (CBDC) would look like and how it would work.

Known informally by the working title 'Britcoin', a UK based CBDC would be a digital version of the pound, regulated and issued by the UK’s central bank, the Bank of England. It would be stored in virtual wallets run by private banks, and spent like cash. Like physical coins and notes, people would not be able to build interest on digital pounds.

If government decided to implement a CBDC, Britcoin could radically overhaul the UK’s monetary system. It would provide the UK with a new currency and payments system.  

Following a report by the Bank of England and the Treasury earlier this year, discussion has been growing about the possible benefits and drawbacks of the use of a CBDC in the UK. 

Here's what you need to know:

How is a CBDC different from a Cryptocurrencies like Bitcoin?

Cryptocurrencies such as “Bitcoin”, “Dogecoin” and Meta’s “Diem” are bought and sold in a largely unregulated market. They are decentralised and issued by private companies.

The Financial Conduct Authority (FCA), the UK’s main regulatory body, oversees transactions to check whether cryptocurrencies and cryptoassets have been used illegally.

Unlike traditional crytocurrencies, a central banks regulates, issues and determines the circulation of a CBDC. 

Cryptocurrencies such as Bitcoin use blockchain technology. Unlike a typical database, it records transactions as blocks on a virtual register. The software makes it impossible for outsiders to see people’s transactions and access their bank balance.

The Bank of England has not yet ruled out using blockchain technology in a CBDC. It is understood that it is considering ways in which it can hold millions of people’s data and financial information in a safe and secure way.

Conservative MP Marcus Fysh, chair of the All Party Parliamentary Group (APPG) on CBDC’s, told PoliticsHome he believed any centrally held digital currency needed to be underpinned by a secure technology such as blockchain.  

He worried a British CBDC could be a “honey pot” for “hackers” if people’s data and transactions were stored centrally.

“I personally think it would be better, if one were minded to do a [CBDC], to issue it on pre-existing, provably secure blockchains,” he added.

"It doesn't make sense to reinvent the core technology of the blockchains themselves or have some sort of a central bank run a database.”

What is the point of a CBDC?

Proponents of a UK CBDC believe it could promote stability in the UK economy. This is at a time when the way people use money has changed rapidly within a short time frame.

Data from the Bank of England has shown that the use of physical bank notes and coins for buying goods and services dropped from 50 per cent in 2010 to 17 per cent in 2020.

While some have expressed concern that digital money such as cryptocurrencies could be seen as a potential threat to a national currency, Ashley Webb, an economist at Capital Economics, told PoliticsHome she believed CBDC’s were being developed by policy makers to protect the current banking system.

However, she claimed the perceived urgency to introduce a digital currency has “diminished” as there seems to be less momentum behind private digital currencies.

“That said, major central banks, such as the European Central Bank and the Bank of England, are still considering CBDCs and are in the exploratory stages.”

How advanced are plans for a CBDC in the UK?

So far, there are no concrete plans to implement a CBDC in the UK. But the Treasury and Bank of England has judged that a digital pound is likely to be needed in the near future.

A consultation ran from 7 February 2023 to 30 June 2023, but the Government is yet to respond. The final decision is expected to be taken by the middle of the decade.

Would it replace cash?

The current proposals for a digital pound state that it would not replace physical cash. The Bank has said they will "continue to issue it for as long as people want to keep using it".

What further plans are coming down the line?

Chancellor Jeremy Hunt has committed to a vote in Parliament if the proposals for a CBDC are brought forward.

Lord Bridges told PoliticsHome he was “very pleased” there would be a hypothetical vote on a proposed digital pound.

“It’s such an important and big step it’s critical that Parliament can hold Ministers to account, scrutinise the proposals and debate the impact of a digital pound,” he said.

What are the concerns around a CBDC?

A number of MPs, peers and experts have expressed concerns that a proposed digital pound could pose a threat to people’s privacy and the UK’s financial system.

Former cabinet minister David Davis told PoliticsHome he was not “an enthusiast” for a UK CBDC, and raised concerns of how it could be controlled.  

“Currency is a very important part of your economy. And I'm not entirely sure how you control the quantity of digital currency. And I also don't like the idea of moving away from cash,” he explained.

He did not believe there was any real “competitive advantage” to a new currency.

Lord Bridges told PoliticsHome he thought the overarching purpose of a CBDC has yet to be “properly defined” by the UK Government.

“There are tangible issues which need to be addressed. How monetary policy is impacted - the impact on banks and how they can lend, how it will be designed. That's before getting on to the concerning issues such as privacy and the role of state,” Bridges claimed.

“It’s such an important and big step it’s critical that Parliament can hold Ministers to account, scrutinise the proposals and debate the impact of a digital pound.”

Maxwell Marlow, Director of Research at the Adam Smith Institute, told PoliticsHome he believed its use unlocks a “plethora” of financial privacy problems for users.

“Whilst the vast majority of pounds are indeed 'digital', the use of a crypto currency by the Bank of England would damage private markets for crypto issuance and development whilst also presenting a cybersecurity risk for the British people's financial security,” he told PoliticsHome.

Are CBDCs being used anywhere already?

American think tank Atlantic Council found 130 countries which make up 98 per cent of the global economy are looking at the benefits and drawbacks of a digital currency. Its data found 19 of the 20 G20 nations were in advanced stage of CBDC development. 

The European Central Bank is in advanced stages of launching a digital Euro. Eleven countries have already launched a digital currency, while major economies such as India, China and South Korea have already piloted schemes and roll-outs.

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