On February 28, the UK Treasury committee held an evidence session on the crypto-asset industry, where the deputy governor explained the reasoning behind a central bank digital currency (CBDC) known as the 'digital pound'. This session followed a 116-page consultation jointly published by the Treasury and Bank of England (BoE), which indicated that a digital pound would likely be necessary in the future for everyday payments by households and businesses, akin to a 'digital banknote'. Although privately-issued stablecoins have emerged in recent years, the consultation argued that CBDCs, such as the digital pound, can coexist in what is expected to be a "mixed payments economy."

The consultation paper released on Feb. 7 said:

“In much the same way that cash exists alongside private money, the digital pound does not need to be a dominant form of money in order to meet its public policy objectives. The digital pound could exist alongside other forms of money, including stablecoins.”

MPs questioned Cunliffe on the need for a digital pound, concerns regarding consumer privacy and financial inclusion, and how to tackle potential new forms of fraud that could arise with its introduction. Cunliffe noted that a CBDC has financial stability benefits and provides another payment system in terms of resilience, as well as an additional asset for people to use in the event of failed banks.

Cunliffe said:

“The first point is that actually CBDC has financial stability benefits, because it provides another payment system in terms of resilience, but it also means that if we ever have to deal with failed banks, again, there is another asset that people could go into.”

The primary motivator behind launching the digital pound is to ensure U.K. central bank money remains “an anchor for confidence and safety” in the country’s monetary system and to “promote innovation, choice, and efficiency in domestic payments.”

The CBDC would be interchangeable with cash and bank deposits, accessible through digital wallets provided by the private sector, and its value would be pegged to the pound. The CBDC would be accessible through digital wallets provided by the private sector and compatible with smartphones and smartcards, enabling payments both in-store and online. However, the proposal suggests imposing individual limits ranging from £10,000 to £20,000 ($12,000 to $24,000) to discourage using it as a savings account.

“A limit on individual holdings would be intended to manage those risks by constraining the degree to which deposits could flow out of the banking system. That is important during the introductory period as we learn about the impact of the digital pound on the economy.”

The joint paper also recognised the privacy concerns raised by many in the crypto community. While not delving into specifics, it affirmed that an e-GBP would be subject to stringent privacy and data protection standards.The central bank would provide a core ledger for the digital currency, which private firms would then use to design services and handle customer interactions. Users of the digital pound would not be anonymous, and while personal data would not be accessible to the government or BoE, holders would have a similar level of privacy as a bank account.

The central bank also sees the potential for the digital pound to promote greater financial inclusion across the UK. Additionally, the bank recognises the importance of ensuring that the CBDC is user-friendly, transparent, and trustworthy to effectively cater to the needs of vulnerable individuals.

Cunliffe acknowledged that other economies were far ahead in this area, and there was more than a 50% chance of the currency going ahead. However, he noted that the bank did not yet have the technical skills to develop a digital pound, and the next phase would involve working with private sector partners to build a prototype for testing in a simulated and live environment before implementation.

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