In April 2021, the Bank of England and HM Treasury announced an initiative to investigate the creation of a “digital pound”.
It said, “A CBDC (Central Bank Digital Currency) would be a new form of money that would exist alongside cash and bank deposits, rather than replacing them”. Two years later, the Bank of England issued a consultation paper on the venture. Today the project continues.
In the past decade there has been a tremendous revolution in the way in which the UK public spends money. Use of notes and coins has collapsed in the face of contactless cards and mobile payment; in 2013 51pc of all payments were made using cash; in 2023, it was 12pc.
This change has been driven by technological and financial innovation, accelerated by the 2020-22 lockdown rules. There have been countless criticisms of the explosive rise in contactless payments – security worries; loss of anonymity; concern about older people managing, and so on, but I have never heard anyone complaining that there isn’t a Central Bank Digital Currency. So I suspect, therefore, that the initiative is producer, not customer, driven.
Why would the Bank feel the need to create a digital currency? There are lots of fine words in the 2023 consultation, but none of the reasons quoted seems to me to be compelling enough to set up a major financial project. My instinct is that the Bank feels threatened by the secular fall in cash use, as the interest foregone by holders of notes and coins is the Bank of England’s principal source of income.
If cash use continues to fall, then it is likely in due course that cash holdings will also fall. A world where cash becomes rarely used, and not widely held, would fundamentally damage the Bank of England’s economic model, and hence its existence in its current (independent) form. While this seems a cynical take, I am struggling to find another credible motive for this project.
Which moves us on to the next question: what is a digital pound? Again, it isn’t clear to me from the Bank’s communication. It appears to be designed to be something that the general public would use, as secure as holding a bank note (that is, a direct liability on the Bank of England), and it would pay no interest.
It would exist as a digital entry on a Bank of England-run platform, and so would be designed to be easy to use, probably like modern contactless or online payment systems. But the vast majority of consumers would say that they already have this facility from UK banks or the newer online payment platforms.
It is true that online payment platforms do not offer a Government guarantee, but for holdings under £85,000, UK banks do.