The Bank of England is debating the issue of a digital currency – quartz
Would the British want a digital fiver? The Bank of England is considering issuing an electronic version of its banknotes.
British officials today published a discussion paper on the possibility of issuing a digital sterling, adding to the debate among central banks on how to respond to falling cash use. The issue is particularly important in Great Britain, where the debit card replaced cash as the most popular means of payment three years ago; Debit cards accounted for 39% of transactions in 2018, compared with 28% for physical notes and coins.
This is of interest to policy makers because there is a crucial difference between physical notes issued by a central bank and the digital money held in a checking account or digital wallet. Cash is issued directly by the central bank, the lender of last resort, while debit cards and payment apps depend on the stability of commercial institutions and can be more vulnerable. According to the Bank for International Settlements, more than a dozen countries are investigating or testing the digital currencies of their central banks as cash consumption drops.
The BoE says it has not yet made a decision whether to introduce a digital pound. In this case, the new legal tender would co-exist with physical cash and not replace it.
“The use of banknotes – the bank’s most accessible form of money – is declining and the use of privately issued money continues to increase, with technological changes driving innovation,” the BoE wrote on its website. “As the issuer of the most secure and trustworthy form of money in the economy, should the bank make electronic money – or central bank digital currency (CBDC) – available to the public to complement physical banknotes?”
The UK central bank acknowledged that an electronic pound could be destabilizing to its commercial banking system. For example, a digital pound could make it easier for consumers to leave their bank in a crisis. At the same time, there could also be advantages: a digital currency could build on modern technology that is more efficient and engages more consumers, while cross-border payments become cheaper and faster through the use of new payment channels.
As the debate expands, many design and technology issues need to be considered. This includes whether to use a distributed system to validate transactions (similar to the blockchain-distributed database behind Bitcoin) or a more centralized authority. The BoE indicated that the system need not be similar to Bitcoin or other cryptocurrencies, although a distributed mechanism could have some advantages. The central bank said it would take submissions until June 12.
Meanwhile, China is reportedly among the most advanced countries when it comes to creating a digital currency, and it has been suggested that a digital renminbi could make the currency more attractive internationally and eventually undermine existing reserve currencies. However, reports from the BoE and the BIS, sometimes referred to as the central bank of central banks, have not addressed this concern and have focused on the needs of domestic consumers.