Though far from official and not likely to be used, “Britcoin” is trending as the name of the digital pound, whose initial plan has been released by the Bank of England and the Treasury. The digital pound will be the CBDC of Britain, and is not likely to see the light of day until a few years from now.
With India’s ongoing pilot of its retail and wholesale CBDC or e-rupee, public attention is turning towards the new money that is likely to be introduced in one country after another. The challenge and the lure of Bitcoin and cryptocurrencies need to be tackled, and the response is in the form of central bank digital currencies – a muted, non-blockchain based, centrally stored digital money using APIs and wallets to be issued by private and public banks.
The need for a digital pound
The consultation paper identifies the need for the digital pound thus: “On the basis of our work to date, the Bank of England and HM Treasury judge that it is likely a digital pound will be needed in the future. It is too early to commit to build the infrastructure for one, but we are convinced that further preparatory work is justified.”
The paper introduces the concepts of a “retail central bank digital currency (CBDC) – digital money for use by households and businesses”, and the wholesale version for bulk settlements between firms.
The paper notes the wide adoption of digital payments, with cash being used in only around 10-15% of cases. “In 2021, card payments accounted for close to 60% of UK payments.”
The paper also notes the number of unbanked people: “Around 1.2 million UK adults do not have a bank account.” With digital currency, banks will be issuing wallets with KYC and any relevant verification. It is not clear whether a bank account would need to be maintained. This level of the CBDC operation will be under the supervision of participating banks.
Public-private partnership for CBDC
“The digital pound system would be a public-private partnership. The private sector would play a crucial role in offering innovative and user-friendly services.”
The “core ledger” will be maintained by the central bank along with provision of the central infrastructure. Private firms and banks will create the interface between the central ledger and the bank. The paper calls them digital ‘pass-through’ wallets. The identities of users will be known only to the interface providers. Small payments may not be scrutinized or tracked, but larger payments would require greater authentication and identity related information as accounts will be used.
The digital pound “would be available to non-UK residents too.”
The paper outlines three phases towards a pilot launch: Phase 1 – 2022. Phase 2 – 2023-2025, and Phase 3 – 2025 at the earliest for pilot tests.
There will be a limit on the amount of digital pound one can hold in the wallet. “An individual limit of between £10,000 and £20,000 is proposed.”
The basic structure of digital pound or CBDC
Identity related issues
“The digital pound would not be anonymous because, just like bank accounts, the ability to identify and verify users is necessary to prevent financial crime. Payment Interface Providers (PIPs) would gather and have access to personal data.”
As one can see above, the digital pound scheme is very similar to India’s pilot e-rupee for retail and wholesale. It won’t be surprising if India will become an indirect learning experience or testing ground, and the pitfalls and failures of the next few years taking place here will be noted and addressed elsewhere.
The Guru will learn from the success and failures of the shishya.
The working paper can be browsed here: https://www.bankofengland.co.uk/paper/2023/the-digital-pound-consultation-paper
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