What’s the value of a digital pound?by
A consultation from the Bank of England and HM Treasury has outlined that a digital pound will be needed in the future, but what purpose will the “Britcoin” serve over and above what currently exists?
The consultation, titled The digital pound: a new form of money for households and businesses? starts with a statement that it is “likely” a digital pound will be needed at some stage in the future.
While the document states it is “too early to decide” whether to introduce the digital pound, it outlines that officials are “convinced preparatory work” on the project is justified.
Describing the central bank digital currency (CBDC) dubbed in some quarters as “Britcoin”, the paper states that the digital pound would be a new form of sterling issued by the Bank of England. It would be a stablecoin pegged to the value of the pound and would act as a digital alternative to cash to be used by households and businesses “for their everyday payments needs”. If introduced, it would exist alongside and be exchangeable with, cash and bank deposits.
“The starting point is that a CBDC is not the same as cryptoassets such as Bitcoin,” Dion Seymour, crypto and digital asset technical director at Andersen in the UK and former crypto lead at HMRC, told AccountingWEB. “A CBDC will, essentially, be issued by a central bank and in many ways the same as the money in your bank account (commercial money).”
Promoting choice and inclusion, or a solution looking for a problem?
The consultation outlines how a potential CBDC would “promote innovation, choice, and efficiency in domestic payments,” but with the UK fintech and payment solutions market booming and the continuing rise of digital payments by consumers, this reasoning seems underdeveloped.
Ben Lee, a partner at PKF Francis Clark and head of the firm’s blockchain and cryptocurrency team, told AccountingWEB he wasn’t convinced about the advantages the approach provides over traditional payment methods.
“While this technology would certainly provide advantages for anti-money laundering endeavours, there could be unwanted implications through programming such as prohibiting certain freedoms that we currently enjoy with our payment methods,” added Lee.
The paper itself states it does “not propose to develop a digital pound that enables government or central bank-initiated programmable money”. However, the idea that such a project could give central authorities greater visibility over individual holdings or transactions raises far-reaching privacy concerns.
“While we note that the government wants to ensure privacy and will not ‘program’ the money, it remains unclear what, if any, safeguards will be put in place to ensure that and prevent others from doing the same (from which the government indirectly benefits),” commented Seymour.
In January 2022, a House of Lords committee tasked with exploring the project criticised the idea as a “solution looking for a problem” that risks “introducing state surveillance of people’s spending choices.”
One potential advantage of a CBDC, highlighted in a 2021 discussion paper on the subject and revisited in the current consultation, was how it could be used to promote financial inclusion.
However, despite mulling over how to offer access to payment services for the most vulnerable, who could be left behind by advances in technology like CBDCs, there were very few concrete ideas for how a digital pound could help. Offline payments – payments conducted without a data connection – are referred to in a separate, accompanying technology paper, but its authors admit that such solutions come with “significant challenges”.
One way Britcoin could potentially be utilised would be to facilitate payments from government help schemes during future pandemics or other events that require large-scale assistance. Rather than the chaotic distributions seen during the recent lockdown periods, money could be added by the government to a centralised wallet for verified users to access. However, whether such hypothetical, potentially limited scenarios justify the outlay of building the digital pound is arguable.
From a tax perspective, the legislative environment would need to shift dramatically before such a currency could be introduced.
“Currently, digital assets similar to a digital pound (stablecoins) are not defined as currency, but assets,” said Lee. “The landscape would certainly need to change in this regard to allow the use of a digital pound without similar tax concerns, which could bring better news for the digital asset industry as a whole. However, it is perhaps more likely that specific allowances will be made for a CBDC to be akin to currency to encourage adoption.”
Overall, Lee takes a more cynical view of the proposed project. “Distributed Ledger Technology has empowered individuals to be in control of their digital assets,” he said. “I struggle to see the advantage of using a digital pound based on this technology that can only be held in wallets by regulated entities.”
Next week AccountingWEB will publish an article from Dion Seymour myth-busting the misunderstandings around CBDCs. To read it, check the AccountingWEB website or sign up for our tech emails using the box below: