A UK CBDC: What Britcoin will really mean

Britain’s financial institutions have been at the forefront of payment innovation for many years, as can be seen through initiatives like the Faster Payments Service (FPS) and Open Banking. 

These same institutions are now investigating the benefits of a British Central Bank Digital Currency (CBDC), or digital Pound. 

Critics argue that UK nationals are already capable of making digital payments through digital wallets and online transactions, raising the question of whether a “Britcoin” is really worth the trouble. 

CBDCs could open up a world of opportunity

The truth is a digital Pound wouldn’t drastically change the way many people send or spend money, at least at first. Functionally speaking, paying with ‘Britcoin’ via an app wouldn’t be much different to paying with pound sterling via an app. 

The real appeal of a CBDC is on a more technical level. They represent a fundamental change to our financial infrastructure, not just an update to its user interface. 

Although this might sound a bit cliché, one analogy would be the shift from dial-up to broadband. Both allow access to the internet, but by virtue of offering a faster user experience, broadband has enabled a huge spectrum of new possibilities: from lag-free movie streaming in 4K to real-time remote collaboration on highly data-intensive work. 

Introducing a CBDC could encourage a similar wave of innovation, with many of the outcomes unknowable today. 

Clearly, that isn’t a very strong argument on its own. But there are known benefits, too. For instance, we know that a CBDC could deliver genuinely instant settlement for consumers and businesses paying and receiving money. 

Someone already using their Apple Wallet to buy groceries today might shrug their shoulders at this, but for large international money transfers, it would be game-changing. 

Although cross-currency payments have developed a lot in recent years, particularly through initiatives like SEPA and Faster Payments, instant transactions are still rare between many jurisdictions. 

Our current traditional banking infrastructure relies heavily on intermediaries, such as clearing houses, settlement networks and correspondent banks to process transactions.

The fundamental underlying infrastructure remains a problem. This can sometimes cause delays in the settlement process, resulting in transactions that take hours or even days to complete depending on the provider. 

A settlement process run through CBDCs could potentially avoid these delays, making the payments system run faster and smoother. 

Although making cross-border payments faster and smoother requires more fundamental changes in market infrastructure than would be delivered by CBDCs alone, the introduction of CBDCs would help reduce friction for financial institutions at the wholesale level, which would in turn result in improved customer experience at the retail level.

Security

At its core, a digital pound comes down to the central bank and commercial banks transforming their engines and fundamentally rethinking their technology infrastructure.

This ranges from how inter-bank money flows to how AML checks are done in a fully digital world. There remains a lot for banks to achieve here, which is why the Bank of England is aiming for a digital currency launch as late as 2030.

Despite the reality of a digital pound being relatively distant, its development should also create opportunities for future innovation in security. For instance, digital currencies have the advantage of being easily made safer through decentralisation. 

Factors such as blockchain encryption mean that all transactions would be visible, and any illicit changes to the chain can be immediately spotted, tracked, and stopped. This provides enhanced security to transactions and reduces the risk of counterfeiting. 

With some research suggesting as much as £4bn was lost to fraudsters in 2022, the added security of a CBDC could prevent a lot of pain for consumers and business owners.      

CBDCs have a lot of potential - but must be implemented carefully

Exploring the possibility of Britcoin is a continuation of the UK’s strong legacy in payments infrastructure, and it’s the right thing to do.

Still, there are valid concerns. Firstly, the benefits of a CBDC must not come at the cost of privacy. Safeguards must be set up to protect consumers. We must also ensure that a Britcoin does not undermine the stability of our financial system, as some economists have suggested could happen if CBDCs encourage mass deposit withdrawals from banks.

This risks limiting the capital available for lending and increasing the financing costs for businesses of all sizes. 

Limiting the amount of digital currency that can be held by any one person, as has been suggested by the Bank of England, seems a solution worth considering. Smaller deposit limits could help offset the risk of bank runs by simultaneously managing risk and supporting the useability of a digital currency.

Critically, though, CBDCs must not be left as a pet project for central bankers and politicians. The decision over whether to introduce a CBDC would be one of the most consequential changes to our financial system since the abandonment of the gold standard, and would come with many potential benefits and risks. 

Only through rigorous public debate can we build a system that works for everyone.