EconomyFeb 28 2023

BoE: Digital pound 'has financial stability benefits’

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BoE: Digital pound 'has financial stability benefits’
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A digital pound could help with financial security with banks, according to Sir Jon Cunliffe, deputy governor for financial stability at the Bank of England.

In an evidence session on the crypto-asset industry today (February 28), the Treasury committee heard from the deputy governor on the reasons for a central bank digital currency (CBDC).

A key area of focus was around the purpose of a CBDC – which the Bank and Treasury call a ‘digital pound’.

This followed a recent consultation from the Treasury and the BoE which found that a digital pound will likely be needed in the future, and would be designed for everyday payments by households and businesses, akin to a ‘digital banknote’.

MPs asked Cunliffe whether the UK needs a digital pound, issues around consumer privacy, financial inclusion and how best to tackle potential new forms of fraud that could arise were a digital pound introduced.

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.”

He explained that one of the reasons the BoE had to bail out the banks in 2008, wasn't because of the supply of credit to the economy, but simply because had they failed, 60 per cent of people's money was locked up because their money was commercial bank deposits. 

“So there are I think there are financial stability benefits in this area as well but there are clearly risks, and there are risks about damage to the banking system,” he said.

Over time, one would want the banking system to adjust to a new reality, Cunliffe explained.

“It's done that throughout its life. I came across a great speech for the 1890s about why banks should not lend against any property. 

I just came back from India actually and there's a lot of things that are happening in the emerging market economies that have gone much further

“It was to deal with a New South Wales banking collapse and a very senior British banker said this is because colonials allowed banks to loan for property. So views about what banks do have changed over time, but we have to be kind of alive to that risk.”

He was also asked whether a digital pound might accelerate the demise of physical cash. 

The CDBC 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 currency would be available on smartphones and smartcards, and would be intended for payments in-store and online, but not for savings. 

“There are lots of different motivations for having the digital pound and the way you would structure a digital pound is different,” Cunliffe said. 

“There are trade offs to be made so our basic motivation here, and the reason we think it's likely to be needed, is to provide digital cash, the digital equivalent of the Bank of England, for general payment purposes. 

“We didn't want a system in which there were two forms of Bank of England money circulating, remunerated and unremunerated and we didn't want a system where we would be producing something which would have the characteristics of a savings product.”

He added: “This motivation is about payments and only payments.”

Cunliffe confirmed there would be initial restrictions on how much an individual or business could hold.

The central bank also said it is mindful that the design of the CBDC needs to be simple and straightforward to use and trusted by the public to ensure it meets the needs of vulnerable people.

Capabilities

Under the BoE’s plans, the digital currency will sit on a core ledger, provided by the central bank, which would provide the minimum necessary functionality.

This infrastructure would then be used by private firms to design services and handle customer-facing interactions.

Users of the digital pound would not be anonymous, however neither the government nor the BoE would have access to personal data, and holders would have a similar level of privacy as a bank account.

Cunliffe said there is more than a 50 per cent chance of the currency going ahead, stating other economies are far ahead.

“First of all, I'm not sure we have one of the most advanced payments in the world,” he said.

“I just came back from India actually and there's a lot of things that are happening in the emerging market economies that have gone much further and you can't use peer to peer payments in shops or wherever as you can in other countries.

“So we have a system that meets today's needs, whether it's one of the most advanced in the world - we could talk about that.”

However, if the decision for the digital pound goes ahead, he said the bank does not yet have the technical skills to develop one.

“We would hope by the end of this next phase to have the skills then to move,” he said.

“The next phase we would move with private sector partners. The move to the next stages would be to build a working prototype to test in a simulated environment and then you'd be into testing in a live environment and then implementation. 

“This next phase is designed to put us in a position to do that.”

sonia.rach@ft.com

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