Fintechs are excited by the potential of a so-called digital pound arguing it will help spur innovation in the UK and create a more competitive payments environment.
Adam Jackson, director of policy at Innovate Finance, told City A.M. that the industry body “strongly supports the introduction of a digital pound”.
He argued that a digital pound would “reinforce the UK’s position as a global leader in payments” while it should also “stimulate innovation across a variety of domestic markets”.
The digital pound is a form of central bank digital currency or CBDC. A CBDC is essentially a digital form of cash which will be created by the Bank of England, unlike existing digital payments which are created through the private sector.
The Bank of England suggests it is “likely to be needed in future” as digital payments become ever more important in the economy.
The proposals have faced some opposition from high street banks who worry that it will potentially limit the availability of bank funding.
Fintechs however have praised the Bank for its focus on boosting innovation.
The Bank proposes to run a platform model, whereby it will run the main architecture but let private sector actors engage with consumers.
Varun Paul, director of CBDCs at Fireblocks and former head of the Bank of England’s fintech hub, said the setup should “create a low barrier to entry for fintechs to compete for customers”.
Jackson agreed that the platform model will “leverage the Bank and private sector’s capabilities to deliver benefits to consumers and businesses by acting as a catalyst for innovation in the digital payments landscape.”
There are a number of different areas that fintechs have cited as possible areas of innovation.
Alisa DiCaprio, chief economist at R3 said the distributed ledger technology which underlies the digital pound could both speed up payments and make them cheaper.
She argued that a digital pound could help move away from “expensive and slow settlement, siloed systems and an overreliance on account-to-account transfer”.
Paul made the same point, saying the digital pound could support “a faster, cheaper and more resilient payment system”.
Financial crime is another area where a CBDC could help. Quant boss Gilbert Verdian has previously told City A.M. that the digital pound could effectively eradicate fraud.
Verdian suggested that fraud protections can be built into the architecture of a CBDC, like the digital pound, enabling a far greater degree of protection than is currently possible.
“When you look at CBDCs, it’s an opportunity to be able to embed fraud protection at a whole network level and then have fraud prevention done by the network itself,” Verdian said.
Using CBDCs, regulators will be able to look at the “pattern of fraud” right across the payments network. This will help to identify suspicious activity which can then be directly targeted.
New payment methods could also reduce financial crime by preventing payments for online goods being made until a delivery has been made.
The consultation on the digital pound closed this summer. The Bank are now working on the design phase before a final decision on whether to go ahead with the digital pound is expected in 2025.