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CBDC UK: Government gearing up for Digital Pound

UK government building with cbdc coins in foreground and yellow filter
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In February 2023, the Bank of England (BoE) and HM Treasury, a department of the UK Government, issued a consultation paper for the potential launch of a retail CBDC.

It discusses the rapidly evolving payment system and proposes that the Digital Pound might be the future solution for households and businesses.

A CBDC (Central Bank Digital Currency) is best explained as a digital fiat currency that can be used for everyday needs. The consultation paper suggests that the UK Government believes in and supports the idea of CBDC. The government is currently preparing for the launch of CBDC by evaluating the policy framework and the technology. However, the final decision on its launch is expected in 2025.

Let's explore the Digital Pound and why the government is so keen to launch it in the country.

CBDC UK: Government preparing to launch Digital Pound

The HM Treasury and the BoE have mentioned in the consultation paper that the CBDC UK is "likely to be needed". It explains that payment systems have become more digitised, and cash usage has dropped significantly in the past decade. 

Additionally, crypto assets have become increasingly popular for investments and cross-border money transfers. It poses a potential threat to the Pound Sterling in the future. Therefore, the government has started to prepare for the launch of CBDCs. 

Many people call the Digital Pound a Britcoin or a digital Sterling. This virtual currency’s main task would be facilitating payments for households and businesses. It will be designed to provide a secure payment method to consumers for their day-to-day tasks. 

However, the HM Treasury and BoE have yet to decide to launch Britcoin. Currently, they are evaluating the technological requirements and other resources that will be necessary to deploy a CBDC in the country. The report says that in the next couple of years, their goal would be to observe innovations in this field while preparing for its launch. We can expect a final decision about its introduction by 2025. 

How would a Digital Pound work?

The virtual Sterling will be issued by the UK's central bank, the BoE. You can easily store it on your smartphone wallet and use it for various transactions. There can be further innovations for its usage, like a smart card that could store the value just like a debit or credit card. It may create further ease for consumers as swiping cards would be more convenient.

Although CBDCs and cryptocurrencies are quite different assets, they both use a core distributed ledger. Users would have to set up their wallets with a wallet operator. Then the wallet operators can use BoE infrastructure through the distributed ledger and offer the digital pounds to the users.

There are many concerns regarding the state surveillance of user data through CBDCs. The consultation paper addresses these concerns and states that the BoE will act as the centralised authority for the virtual currency.

However, the paper emphasises that the BoE will not have access to user data. Instead, the responsibility of handling and securely storing data will be entrusted to wallet operators.

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Why do we need a Digital Pound?

The consultation paper for the virtual pound has enumerated various reasons why a CBDC has become necessary. Some of them include:

  • The increasing use of cards and digital payments instead of cash.

  • The rising popularity of cryptocurrencies. 

  • The high cost of cross-border payments.

  • Ensuring the sovereignty of the central bank and Pound Sterling.

  • Promoting innovation and efficiency in the financial sector.

These reasons for introducing a virtual currency are valid but mostly reflect the government’s perspective. However, a CBDC can also benefit consumers in various ways.

  • It will make payments more convenient for consumers.

  • It can significantly reduce the cost of money transfers.

  • It may improve financial inclusion by making it easier for people to access and use financial services.

  • Instant money transfer to other countries. 

What is the CBDC UK Government timescale?

Central banks globally have been exploring the idea of CBDCs for a long time. The BoE is among one those that started early and completed its initial research in 2022. However, it has announced three phases for a possible launch of its Britcoin.

In February 2023, it published two papers; The Digital Pound: a New Form of Money for Households and Businesses? Consultation Paper and The Digital Pound: Technology Working Paper.

This marked the first phase of the Digital Pound roadmap, which has initiated discussions on how CBDC UK can be implemented. Meanwhile, the consultation deadline is 7 June, 2023.

chart showing phases of UK CBDC

For the second phase, the BoE has given an estimated period of 2023 to 2025. Most of the work on its design and infrastructure will take place in this phase. Finally, the development of prototypes will be done in the last phase, which is expected to be completed by early 2025. 

Only after going through these phases will the HM treasury and BoE decide on the CBDC's launch. So, a retail CBDC UK Government launch would take several years and is unlikely in the first half of this decade, just as John Glen predicted in 2021. 

Potential risks of Digital Pound

Although there are many benefits of CBDC, it poses several risks too. To deploy an infrastructure of CBDC, the UK government needs to overcome the following challenges:

  • State surveillance: It is the most important challenge for the government as it has to ensure consumers the safety of their data and complete control over their funds.

  • Cyber crimes: Distributed ledgers are secure and transparent but can be vulnerable to cyberattacks. Therefore, the government must have a robust CBDC infrastructure.  

  • Offline payments: It is another critical area, as internet access is limited in some places, which may cause limitations for consumers.

  • Economic instability: If the Digital Pound became a widely accepted payment method, private banks and firms may suffer financially, which could cause financial instability. 

From reducing money exchange costs to more financial inclusion - a Digital Pound may have many benefits for household and business usage. However, the UK Government must consider potential risks to design a secure CBDC that protects people's privacy.

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Author: Wasay Ali

Author: Wasay Ali

Wasay Ali is a versatile professional writer with global experience and a background in mechanical engineering and social science. He is adept at crafting news and informational content for the crypto space and has experience writing for other niches. He is a professional SEO content writer who has worked with several digital marketing agencies and clients in the US, UK, Pakistan, and Europe. He is a dedicated volunteer and enjoys reading, writing, poetry, and going to the gym. He is an INFJ-A personality type dedicated to positively impacting the world. Wasay has a passion for writing as it allows him to express his creativity, share his knowledge, and connect with people worldwide.

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