The Bank of England (BoE) and Treasury believe that the UK is likely to need to create a Central Bank Digital Currency (CBDC), with a prototype potentially being available by 2025.

Chancellor of the Exchequer, Jeremy Hunt said:

“While cash is here to stay, a digital pound issued and backed by the Bank of England could be a new way to pay that’s trusted, accessible and easy to use”.

“That’s why we want to investigate what is possible first, whilst always making sure we protect financial stability.”

The official consultation paper which outlines the case for a digital pound can be viewed here.

In addition, the Technical Working Paper which discusses the BoE’s thinking on CBDC technology can also be found here.

The digital pound would be used by households and businesses for their daily payment needs.

The Governor of the BoE, Andrew Bailey and Chancellor, Jeremy Hunt, outlined a plan to prevent a “run” on banks.

They state that consumers will be prevented from hoarding the digital pound, as to prevent large and rapid outflows from traditional banks. A £10,000 limit has been mentioned.

Furthermore, no interest will be paid on holdings.

The BoE envisions that the digital pound would be accessible through digital wallets that are offered by private sector companies that were pre-approved.

Regulated firms will be able to use the digital pound infrastructure to “design innovative, user-friendly services and handle all customer-facing interactions”.

Cash payments have declined in recent years, with the UK experiencing a 35% drop in cash payments in 2020. Cash accounts for approximately 17% of payments, with the remaining 83% being debit and credit card payments.

What are CBDCs?

A CBDC is a form of fiat currency such as the Pound, Euro or US Dollar that is issued by the central banks of various countries in token or digitized form, and it’s value is pegged to the domestic currency.

Since a CBDC is issued by central banks, they have full authority and regulatory control over the CBDC. It is therefore also centralized, unlike Bitcoin which is decentralized.

The implementation of CBDCs is in the early stages, but over time, certainly within this decade, it is likely that they will become more widely adopted.

In addition to the UK, the US, China and the Eurozone are also considering the implementing their own CBDCs.