The Bank of England’s proposed digital pound: what does it mean?
The Bank of England has begun a consultation on the introduction of its own digital pound as it seeks to gain a foothold in the unwieldy world of cryptocurrencies and stablecoins.
The consultation, which has been launched in conjunction with the Treasury, sets out proposals on how the digital currency would operate and invites businesses and members of the public to review its design and implementation.
Is the Bank of England creating its own cryptocurrency?
No – the Bank is clear that it is not seeking to make its own cryptocurrency. Crypto coins like Bitcoin are viewed by the bank as highly speculative and not a substitute for what are known as fiat currencies – currencies issued by central banks.
Instead, the Bank says it is seeking to make something similar to stablecoins. A stablecoin is like a cryptocurrency but its value is pegged to a real asset, for example, to the price of a commodity like gold or to existing fiat currencies like the dollar.
This means the value of the digital currency will move in line with the value of the pound – instead of moving wildly up and down compared to the pound, as Bitcoin has done over the past year.
When will the digital pound launch?
A final decision has yet to be made on whether the digital pound will go ahead. If it does, it’s not expected to be launched until towards the end of this decade.
What will it be used for?
The Bank of England says the user experience for the digital pound will be virtually identical to making payments online today, so it could be used for things like buying stuff off Amazon or Facebook marketplace using a smartphone. Where it will differ though, is the Bank said it can’t be used to earn interest, and at least initially there will be limits on how much each individual can own, so on that basis it’s unlikely to replace traditional bank accounts any time soon.
Will it replace cash?
No – at least not in the short term. The Bank of England says the introduction of the digital pound is designed to complement existing types of payments like cash, rather than replace them. Usage of the digital pound is expected to be small initially, but if adoption becomes widespread, it could overtake the number of transactions made by cash.
How will it differ from other coins?
Unlike cryptoassets and stablecoins, the digital pound would be issued by the Bank of England and not the private sector.
According to the Bank, this means that it will have intrinsic value and not be volatile, unlike unbacked cryptoassets as there would be a central authority to back it.
Could it improve financial stability?
The Bank could be concerned that, without a central bank digital currency, digital payments could move towards stablecoins issued by private companies. These coins may be pegged to a currency like the pound but if something happens to the company or the way the coin is managed, that could spook investors, leading to a run on the coin and the collapse of the company, causing individuals and businesses to lose money and threatening the stability of the pound.
Instead, a digital currency issued by the Bank is much less likely to collapse and can be relied upon by individuals and institutions.
Are other central banks planning on launching similar products?
Yes – the US Federal Reserve and the European Central Bank are also considering proposals to launch their own digital currency for the dollar and the euro. Though they are both no closer to launching one than the Bank of England is.
