John Cunliffe, deputy governor of the Bank of England, said a ‘digital pound’ would be needed to maintain trust in the UK’s monetary system while he set out limits for its use to preserve financial stability.
Speaking at UK Finance, Cunliffe said the Bank could not ignore the possibility that the use of cash would become increasingly irrelevant while “new forms of money” would become more and more prominent, threatening trust in the monetary system.
These developments made it likely that the UK would need a digital pound to perform the “anchor function” that cash has performed in the past.
Cunliffe also outlined in more detail the Bank’s response to concerns that the introduction of the ‘digital pound’ could affect financial stability by prompting outflows from Banks’ deposits.
The Bank is likely to propose a temporary limit on ‘digital pound’ holdings of between £10,000 and £20,000, he confirmed.
“A limit of £10,000 would mean that three quarters of people could receive their pay in digital pounds, while a £20,000 limit would allow almost everyone to receive their pay in digital pounds”.
Admitting that the Bank could be wrong, Cunliffe stressed that it was taking a forward-looking approach. “We don’t always want to be five years away from this” given how quickly things have changed in other spheres, he said.
In 2021, Cunliffe noted 85 per cent of payments in the UK use private commercial bank money. Debit and credit card transactions made up 69 per cent of transactions while physical cash use was only five per cent.
He said a wide range of new firms, “including big techs and some players from the crypto universe”, are interested in the possibilities of new technologies in money and payments.
“Dominant issuers of new forms of private digital money may create ‘walled gardens’” – when one form of currency cannot be exchanged for others.
“This raises… the question of how we can continue to ensure that all of the types of money used in the UK are denominated in sterling, remain safe and that each is interchangeable on demand and to all of the other types of money without loss of value.”
The speech came the day after the Bank and the Treasury said they were considering introducing a ‘digital pound’.
A consultation will run for four months before the project will enter the design phase. A final decision is expected to be made in 2025.