‘Digital pound’ possible by 2030 in bid to combat falling use of cash

Andrew Bailey holding banknote - Joe Giddens/PA Wire
Andrew Bailey holding banknote - Joe Giddens/PA Wire

The Bank of England and Treasury will next week throw their weight behind a "digital pound" as they set out a roadmap to introduce a new central bank currency by 2030.

Andrew Bailey and Jeremy Hunt are expected to say it is "likely" that a new form of money will be needed as cash use continues to decline in an increasingly digital economy.

It is understood that any new state-backed digital currency – which has been dubbed “Britcoin” in the press - would sit alongside cash. However, the plans are likely to fuel fears that physical currency could one day be phased out altogether.

The decision by Mr Hunt and Mr Bailey to throw their weight behind the project comes almost two years after Prime Minister Rishi Sunak set up a taskforce as Chancellor to explore whether to create a so-called central bank digital currency (CBDC).

"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," the Bank of England Governor and current Chancellor say in extracts of a consultation paper seen by The Telegraph.

"It is too early to commit to build the infrastructure for one, but we are convinced that further preparatory work is justified," Mr Hunt and Mr Bailey will say.

A CBDC would use blockchain technology currently used by cryptocurrencies to record transfers on a central digital ledger.

The Bank of England already creates money digitally by issuing new reserves at commercial banks but a CBDC would theoretically allow the Bank to issue new currency digitally directly to individuals or businesses.

However, it is understood that the Bank is not exploring a route that would involve a direct relationship with the public where people could open an account at the Bank of England.

A CBDC would also allow people to hold digital currency on devices such as smartphones without the need for a bank account, similar to how physical cash can be held in a wallet.

It would be issued by the Bank of England in the same way as physical banknotes and have the same value as their banknote equivalent.

The Bank and Treasury will launch a four-month consultation in which businesses, academics and the wider public will be invited to share their views on the launch of a digital pound.

Britain's Prime Minister Rishi Sunak and Chancellor of the Exchequer Jeremy Hunt (L) buy sweets during a visit to Accrington Market Hall on January 19, 2023. (Photo by Christopher Furlong / POOL / AFP) (Photo by CHRISTOPHER FURLONG/POOL/AFP via Getty Images) - CHRISTOPHER FURLONG/POOL/AFP
Britain's Prime Minister Rishi Sunak and Chancellor of the Exchequer Jeremy Hunt (L) buy sweets during a visit to Accrington Market Hall on January 19, 2023. (Photo by Christopher Furlong / POOL / AFP) (Photo by CHRISTOPHER FURLONG/POOL/AFP via Getty Images) - CHRISTOPHER FURLONG/POOL/AFP

The announcement may fuel fears that cash could be phased out. However, the Government last year passed legislation to protect access to cash and the Bank has previously stressed that any digital currency would "sit alongside" cash rather than replace it, a message that it is expected to be reinforced in the consultation paper.

It is understood the Bank and Treasury will begin the "design" phase of the project to develop a blueprint of how a digital pound could be constructed and used.

The creation of a CBDC is expected to take several years and sources said it would involve "significant public investment".

Officials have identified 2025 as "the earliest" date the Bank could start building and testing a currency prototype. No decision on whether to go ahead with a CBDC is expected until then. The Bank has previously said that the earliest date for launch of a UK CBDC was "the second half of the decade".

Other countries are already trialling national digital currencies, with China an early trailblazer. Trials of the digital renminbi first began in 2021.

City minister Andrew Griffith MP told the Treasury Select Committee earlier this month: "There are some really important public policy issues about how you come forward with the design of a sovereign digital currency. We have to get them right. I would rather be right than be first."

The pandemic has sped up the use of debit and credit cards as the main form of payment for everyday retail spending, while cash use has declined from more than half of all transactions ten years ago to around 15pc today.

Threadneedle Street would establish a public platform that tech firms could use to provide their own services as the connection between the Bank and customers.

Consumers could access the cash via a smartphone or card, with services regulated in a similar way as banks are today.

While the Bank has argued that a CBDC would help to foster competition by ensuring no private sector firm dominates the market, others have been sceptical about its introduction, including a former governor of the Bank.

Lord King warned this week that the introduction of a CBDC offered "risks but no obvious benefits”. He cautioned against creating something the public didn't need just because it had the “sexy name of a digital currency”.

"CBDCs are about ways of making payments. Not a new currency," he said. "So whether a country needs a CBDC is really all about the state of its current payment system."

He pointed out most transactions were already digital, and served well by the current system of commercial banking. "No doubt further improvements are possible, even desirable, but none require a CBDC," he added.

A report by the Lords Economic Affairs Committee also warned that the introduction of a CBDC could lead to more "state surveillance of people’s spending choices" or even "financial instability as people convert bank deposits to CBDC during periods of economic stress".

The Bank and Treasury are expected to stress that personal details will "not be known by the Government or the Bank of England", with CBDC expected to offer the "same privacy as most of the money we use".

However, the consultation paper concedes that under some circumstances, law enforcement agencies would have access to users' data on the same basis as currently apply to current financial services.