The digital pound faces a range of challenges before it could be adopted in the UK, experts told City AM, as industry figures continue to grapple with the announcement that a central bank digital currency (CBDC) is “likely to be needed” in the future.
The risks a so-called Britcoin poses to financial stability and the potential it could undermine privacy are two of most significant hurdles.
In the Bank of England’s consultation report, it said: “In periods of banking or financial stress…if outflows to digital pounds were particularly large and rapid, banks might be unprepared and find it difficult to replace lost deposits.”
To counter this risk, the Bank is likely to propose a temporary limit on digital pound holdings of between £10,000 and £20,000.
Quentin Vanderweyer, assistant professor of finance at Chicago Booth School of Business said central banks may deliberately make CBDCs “unattractive” to try to avoid bank runs, but suggested this may not be enough as “the main comparative advantage of a CBDC is its safety.”
The ease with which CBDCs can be transferred increases the risk of a bank run as “it’s no effort to push a button on your smartphone to transfer money.”
However, Keith Bear, fellow at the Cambridge Centre for Alternative Finance, said the biggest challenge, in the experience of most countries who have trialled the use of CBDCs, is actually securing adoption.
“The problem is really going to be about adoption and having sufficient adoption to make the whole thing worthwhile, rather than having too much adoption and creating a risk of bank loans or commercial bank disintermediation,” Bear said.
“Navigating that middle ground is one of the real challenges, it’s not a trivial undertaking,” he said.
Privacy is another flashpoint for central banks. While the Bank has stressed that the accounts would be anonymous, previous comments from officials suggest the digital pound could, in theory, be programmed to buy some products and not others.
In 2021 – well before the publication of the consultation – Jon Cunliffe said “you could think of giving your children pocket money, but programming the money so that it couldn’t be used for sweets.”
This has sparked fears it could be used to spy on consumer spending, with a House of Lords committee concluding a CBDC could be an instrument for “state surveillance”.
These concerns are shared by the crypto industry, and, as CMS’s Charles Kerrigan noted: “It’s not every day that the Lords and the crypto industry see things from the same hilltop.”
Under the proposals customer details will remain with the commercial banks and other payment interface providers, meaning that, in principle, it should not be different to the privacy rules on private bank accounts.
“If there is suspicious activity, crime prevention authorities will be able to investigate on-chain transactions, but this is no different from today,” Partner at Ashurst Bradley Rice said. He also pointed out that “most people willingly share data with social media companies and with innovations like Open Banking and Open Finance.”
The real issue is trust, said Bear. “People need to believe the central bank”, he said, stressing the need for a well developed education and awareness campaign from the Bank, both to generate trust in a CBDC and to differentiate it from other cryptocurrencies in the public consciousness.