In this article, our CEO and Founder, Gilbert Verdian, explores some of the misconceptions raised in the response to the Bank of England and HM Treasury’s consultation on the digital pound and provides his expert opinion on the challenges it outlined.
On 25 January 2024, the Bank of England and HM Treasury published their response to the consultation on the design of a digital pound, a potential retail central bank digital currency (CBDC), launched in February 2023.
After receiving over 50,000 responses, it was clear there was widespread interest in a digital pound. However, many respondents were concerned about the implications of a digital pound in relation to access to cash, user privacy, and control of money.
1. Concerns around privacy and security
It’s important to acknowledge that the concerns expressed around privacy and security are to be expected, given that they have been a recurring theme since the beginning of CBDC exploration. However, we believe they are clouding the benefits a digital pound could bring to our current payment infrastructure. While, to some degree, the concern is valid, the decision to introduce a digital pound and the process of ensuring government and parliamentary oversight is no different than when other forms of money have been introduced.
For a digital pound to deliver on the guarantee for users’ privacy and control, it must match or exceed the capabilities of today’s money – from both a security and resiliency perspective. The Bank of England’s Former Deputy Governor, Jon Cunliffe, reiterated this point, “Privacy and anonymity are two different things – a principle that’s enshrined in today’s payment systems and which will be no different for central bank-backed digital currencies (CBDC).” Therefore, it is important to note that CBDCs will operate in the same way as all other forms of money. Financial institutions already have the infrastructure to identify malicious actors and combat fraud, and the rules we have today will continue to apply to CBDCs.
Where CBDCs offer additional protection, is through its technical benefit and ability to provide access to transactional telemetry. This enables regulators and banks to conduct ‘health checks’ on the resilience and liquidity of their systems. Another benefit of this technology is that it will provide a new way for financial institutions to tackle fraud and systemic risk by giving banks a better view to control fraud before it occurs, rather than the reactive approach we have today.
2. The need for education
Since the 1960s, when the first bank cards were issued, there has been reluctance to adopt new forms of money. However, as we move away from electronic money towards digital money, and as society continues to favour convenience and choice, we will naturally see an increase in the adoption of this technology. But why should we opt for a digital pound over an electronic one? One of the most significant benefits is that a digital pound allows institutions to take complex, manual processes and automate them, by coding logic into the money itself, similar to what we’re seeing with programmable payments.
3. Ensuring financial inclusion
As financial services become increasingly digital, it is vital that the Government ensures that all demographics can access financial products and services, whatever their circumstances. As a result, they are considering how the design of a digital pound could improve financial inclusion, given the current challenges that specific groups face when it comes to accessing our payment system.
For the first time, we’re now witnessing regulated entities and new entrants such as fintechs being given access to central bank money. Not only does this open the pool of potential participants, but it also spearheads innovation and allows businesses to create new products for people who don’t need a traditional bank account – this includes the unbanked, digital nomads and people with no fixed address.
And while the barriers to getting a bank account are there to prevent fraud and mitigate risk, this new flexibility will enable a new ecosystem to create new end products using central bank money and start to address the challenges and friction we face in payments and around financial inclusion.
In a similar vein, concerns were raised about the importance of safeguarding access to cash, particularly for people who are not digitally savvy. While cash is in decline, it plays a critical role in our society, which is why the central bank will continue to safeguard and preserve access to it.
What’s in store for the future?
We know that the current system needs overhauling. It is no longer fit for purpose in today’s digital society. Legacy architecture should be replaced with a next generation system that can grow as we grow, but also meet the demands of the marketplace today.
As we enter this new era of digital finance, the UK should begin to position itself as a world leader. Firstly, by revisiting our regulatory regime and secondly, using the digital pound as the vehicle through which we can work to develop a new regulator that is responsible for all forms of digital finance. By doing this, we can set ourselves apart and create the perfect landscape for this technology to flourish.
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