Will there be a price to pay for the digital pound

What you need to know

Following the establishment of the Central Bank Digital Currency (CBDC) Taskforce in April 2021, the Bank of England and HM Treasury have this week published a consultation paper on the potential introduction of a new form of digital money in the UK. The new digital pound will provide a new method for making payments for everyday needs.

The consultation period runs until 7 June 2023. The Bank of England and HM Treasury are encouraging responses from both the financial services industry and the public.

In the background, the Bank of England and the Treasury are currently producing a technical blueprint for the digital pound. It is expected that this will take about three years and, following this, a more conclusive decision will be made about whether or not the digital pound will continue to be developed.

Why does this matter to regulated firms and businesses operating in the UK?

Whilst no decision has yet been made as to whether a digital pound will be introduced, the question of whether it is necessary at all is attracting substantial interest from the Bank of England and HM Treasury.

It's thought that, if the digital pound is introduced, it has the potential to drastically change the way we transact with one another which will likely result in broader implications for the financial sector and, in turn, the economy (as set out in Sir Jon Cunliffe's speech).

Our key initial takeaways

1. It is likely that a digital pound is going to be introduced in the UK over the next few years – whilst the consultation paper isn't conclusive on this at this time, the Bank of England and HM Treasury have commented that it is "likely that the digital pound will be needed in the future" and continued work in this space indicates that it is likely to go ahead. However we do not expect it to be in common use until the end of this decade (at the earliest).
2. The digital pound is not a cryptoasset – the Bank of England and HM Treasury are keen to stress that the digital pound is not a cryptoasset. The digital pound would be a new form of money to be used in the same way as bank notes are used today. Although crypto technology based on Distributed Ledger may be useful in the development of the digital pound, the nature of the digital pound will be fundamentally different from the likes of Bitcoin (to name one example).
3. The digital pound may give rise to more challenger banks / payment institutions – Sir Jon Cunliffe has commented that the digital pound creates "scope for innovation to generate further efficiencies in payments…". which may be "facilitated by new technologies and new entrants to payments markets offering new functionalities". We can expect new market entrants and the rise of non-bank firms providing digital pound services to disrupt the traditional market further.
4. Will the digital pound cut out the middleman? The Bank of England and HM Treasury are proposing that the digital pound will be a "partnership with the private sector". However, unlike traditional bank accounts, the "pass-through wallets" (provided by private sector firms) will act merely as a method to pass on instructions to a central infrastructure held by the Bank of England. This means that all digital pounds would be held centrally by the Bank of England. This could cause liquidity issues for banks if customers decide to move money held in traditional accounts to digital pounds held on the Bank of England's central ledger (as previously pointed out by the House of Lords Economic Affairs Committee). Initial limitations on the quantum of how many digital pound each one of us is permitted to hold will ensure that bank liquidity models remain viable for the foreseeable future.

The Ashurst Digital Assets team is preparing a detailed response to the consultation and remains at the forefront of developments affecting the digitalisation of money and financial assets.

Authors: Lynn Dunne and Laura Bell