by Varun Paul, Senior Director of CBDCs and Market Infrastructure, Fireblocks
The Bank of England’s ambition to create a digital pound has attracted mixed reactions.
A recent survey carried out by the CFA Institute, a worldwide association for bankers, investors and finance chiefs, found that only 46% of UK finance professionals supported the creation of a digital currency. A separate survey by Trezor found that 51% of individuals were concerned that the government could more easily track every transaction.
It’s clear the Bank of England has its work cut out if it wants the digital pound to be adopted successfully. And it’s important that it is if the UK is to keep up with the evolving global financial system.
According to the Bank for International Settlements (BIS), 93% of central banks are already researching central bank digital currencies (CBDCs), with up to 15 retail and nine wholesale CBDCs expected to be in circulation by 2030. Countries like Australia, Brazil, India and Japan are already running pilots, which give them the opportunity to leap ahead of Britain.
For the UK to become a global leader in CBDCs, and to address concerns from both institutions and the public, the Bank of England must embrace innovation and put privacy at the heart of the digital pound.
Privacy above all else
UK Finance, which represents more than 300 financial services businesses across the country, warned that a digital pound was “likely to trigger concerns about privacy and state interference”. The Trezor survey found that 73% of individuals were concerned about the government exerting control over their funds.
It’s understandable that people are concerned, and the Bank of England has acknowledged the need to reassure the public and prioritise privacy in its proposal for the digital pound. Its recent consultation paper proposed that only anonymised or aggregated data would be sent to the Bank of England, and as a matter of principle that neither the government nor the central bank would have access to personal information or be able to monitor individual transactions. It also explained that the digital pound would not be programmable by the government or central bank.
However, some members of the public will not be persuaded by the idea that transactions will be anonymised or aggregated if they are still stored on a central ledger operated by the Bank of England, particularly in a world of location data and clever data analytics. And many other questions remain unanswered.
Some scepticism from the public is healthy. But conspiracy theorists have mobilised against CBDC, so perceptions will also be skewed by misinformation.
Because of this, the Bank of England and HM Treasury will need to go further and faster to persuade the public that a CBDC will protect individual privacy. They need to facilitate a public conversation about how we as citizens want to define our relationship with central bank-issued money in the future. And they will need to ensure that privacy measures are hardwired into the digital pound, so they can’t be unwound by future governments, for example.
In truth, a CBDC could actually go further than just preserving the status quo on privacy. The Bank of England should take this opportunity to show global leadership by delivering a digital pound that uses technology like digital ID and zero-knowledge proofs to actually enhance individual privacy.
Creating a digital pound that’s fit for the future
While the Bank of England should be applauded for confronting privacy head-on, it has been decidedly cautious in embracing cutting-edge technology. At its core, the digital pound proposal describes a central ledger operated by the central bank, and a messaging system that enables wallet providers to update (anonymised) account balances. There is nothing innovative about that.
Meanwhile, countries like Australia, Brazil and India are already piloting CBDCs based on blockchain technology this year. The Bank of England needs to be similarly forward-thinking or it will fail to deliver value for money for the UK public.
Now is the time to speak to the most innovative digital asset companies in the world, and learn from other central banks that are leaping ahead, to develop a solution that really is fit for the future.