Laith Khalaf, head of investment analysis at AJ Bell, comments on the consultation launched today by the Treasury and the Bank of England into introducing a digital pound:
“The government is preparing the ground to launch a digital pound, which could have profound ramifications for the banking sector, consumers, businesses, and existing crypto assets. The Treasury and the Bank of England are exercising caution because of the risks Britcoin poses to the UK’s financial stability, which is why they are suggesting paying no interest on digital pounds, and limiting the amount individuals can hold. The fear is that without fairly hefty limitations a digital pound could undermine the banking sector, and in the worst case scenario lead to a bank run.
“Britcoin is best thought of as a digital version of a bank note, which is a token that carries a certain value in pounds sterling. People don’t hold large sums in paper money because it’s more convenient and secure to hold cash with commercial banks, but unlike a stack of tenners, Britcoin should be both easy to manage and safe to store. That’s because rather than residing in a safe or under a mattress, digital pounds would sit in an electronic wallet, accessible via smartphones or smartcards.
“The potential benefits of introducing a digital pound include facilitating cross border payments, without the eye-watering fees often levied by high street banks. The digital currency will also require a supporting infrastructure from the private sector in its interaction with customers, which would be an opportunity for fintech firms. It could also offer an alternative to card payments for online retailers, reducing the risk of provider outages and delays in receiving payment. It would also lessen the chance of a private sector digital coin, with less regulatory supervision, usurping these functions, and wrestling monetary control away from the central bank.
“Britcoin could also facilitate micropayments, which might become more economical if the digital currency is successful in driving down transaction charges. This could be useful for low value commercial transactions, opening up the potential for customers to pay small amounts of money for a fleeting service, like reading a solitary news article instead of paying a monthly subscription. A digital pound could also allow money to be programmable, so that transactions occur if certain conditions are met. This could include smart electric meters automatically settling bills based on usage, the automatic payment of taxes at the point of a transaction, or taxpayers claiming immediate tax refunds on pension contributions.
“However, there are considerable risks too, which is why the government is taking its time with this one, in order to make sure that introducing a digital pound doesn’t threaten the UK’s financial stability. Consideration should also be given to the fact that any sweeping financial innovation is likely to be a rallying cry for scammers, who will flock to the scene of any confusion to misappropriate funds wherever possible. A digital pound certainly looks worth investigating, and could ultimately deliver considerable benefits to consumers, but the central bank needs to tread very carefully indeed.
“The UK is not the only country looking at introducing a digital currency, and it wouldn’t come as a surprise to see a spate of innovation in this area across the globe in the next decade. The development of central bank digital currencies is a fly in the ointment for the long term adoption of cryptoassets like Bitcoin. A digital pound would provide many of the potential transactional benefits of cryptoassets, without the extreme price volatility, and hence be a more attractive option for businesses and consumers. Investors may continue to buy cryptoassets in order to speculate on price movements, or to stick two fingers up to the establishment, but central bank digital currencies mean they could ultimately find themselves holding onto a busted flush.”
