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Bank of England official hails digital pound as 'new frontier' of money

British pound coin from abstract polygonal points blue. Low poly coin in motion, lines and connected to form, vector illustration. Money sign wire frame digital illustration
A retail digital pound for the UK will 'open up a new frontier in how money is used', according to the Bank of England's Jon Cunliffe. (antoniokhr via Getty Images)

The Bank of England's (BoE) Jon Cunliffe has declared that a digital pound for the UK will "open up a new frontier in how money is used".

On Tuesday, the UK's Treasury Committee heard from BoE's deputy governor on how Britain's central bank is designing a digital pound in response to innovations propagated in the crypto-asset industry.

Speaking about the technology that underlies bitcoin (BTC-USD) and cryptocurrencies such as ethereum (ETH-USD), and how the incumbent financial system needs to integrate these innovations, Cunliffe said: "Some of the new technologies that have emerged in the crypto world offer a prospect of a much deeper integration of the transfer of value and settlement.

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"Existing systems of electronic transfers do not offer the same programmability, the same automaticity, that have been developed using these techniques."

He added: "We see the prospect of a very new form of payment system developing, and to assume that people will not use these new technologies to develop new forms of functionalities, I think would be to ignore the evidence that we have seen in the digital revolution, the Bank of England needs to be ready if that happens."

When quizzed by MPs as to why the UK needs a digital pound and all the associated expense of rolling out central bank digital currency (CBDC) architecture, Cunliffe stated that a digital pound "could have benefits for the economy and for society".

Citing how the ubiquitous iPhone now has several million apps despite launching with only 15, Cunliffe added: "This is about opening a new frontier for people to improve payments and the way in which money is used and in how we transact."

"We want to open up that frontier so that there can be a public settlement asset, a public payment rail," he added.

The BoE deputy governor then gave examples of what a digital pound could be used for, such as micro-payments "which will be much, much easier for people to make using a CBDC".

Read more: Crypto live prices

He explained two detailed scenarios that of CBDC use, stating: "So if you wanted to read an article in a newspaper, you wouldn't have to subscribe to the newspaper, you could pay tiny fractions to do that.

"This might also be about automated delivery versus payment systems, where rather than pay for something on the internet, and then when it doesn't arrive try and get your money back, you can instead scan a barcode when it gets delivered to your door and then the funds get locked in advance and the merchant knows there will be automaticity of payment, which we cannot do at the moment."

Britain's Deputy Governor of the Bank of England Jon Cunliffe speaks during the Bank of England's financial stability report at the Bank of England in the City of London, Britain June 27, 2017.  REUTERS/ Jonathan Brady/Pool
Bank of England deputy governor Jon Cunliffe was addressing the Treasury Committee. Photo: Reuters/Jonathan Brady/Pool (POOL New / reuters)

CBDCs and programmable money

A CBDC can become so-called programmable money because it is based on blockchain technology, which enables the creation of smart contracts.

Smart contracts are self-executing agreements that can automatically trigger specific actions based on predetermined conditions.

This means that a CBDC can give central banks the control over where, when and on what users spend their money on.

They can be programmed to perform certain functions, such as automatic tax payments, conditional spending limits, or even expiry dates on the digital cash that people hold.

Referring to this functionality, Cunliffe said: "This may also be about allowing users to programme their money so it can be used in some ways, but cannot be used in other ways.

"A good example being at the moment, if I wanted to do an automatic payment, I do a direct debit which is effectively a blank cheque, that allows somebody access to my account.

"With payments at the moment, they are quite clunky and they are blunt instruments. Whereas with CBDCs and programmable money, this would allow much more differentiation and much more variation."

Is a Bank of England CBDC a defensive play against crypto?

Cunliffe was then asked if the Bank's CBDC project was a defensive reaction against the growing popularity of decentralised payment systems developed in the cryptocurrency sector.

The deputy governor of the BoE agreed that if decentralised finance and the other elements of the crypto-ecosystem where to gain widespread use it could marginalise central bank control over payment systems.

He said: "Where the trends in crypto to develop, it poses two really big questions, one is if we have new players come in, if they move quickly and get to scale, how do we ensure the integrity and uniformity of money in the UK? Cash at the moment plays a role in tying the system together, because of Bank of England cash, we now need a digitally native central bank asset that ties the system together.

"What we don't want is one or two private new monies developing on big tech platforms that can become very popular, and then people who want to develop payments services around that have to operate on that platform."

What are CBDCs?

CBDCs are digital versions of a country's fiat currency, issued and backed by the central bank of that country.

Unlike cryptocurrencies, CBDCs are not decentralised and are not based on a blockchain. Instead, they operate as a digital representation of a country's currency and are typically intended to be used as a means of payment in the same way as physical banknotes and coins.

CBDCs are still in the development and trial phase in many countries, with a few countries having launched pilot programmes and some having plans to launch a digital currency in the near future.

They can come in two forms, wholesale CBDCs that are exchanged between intermediary banks, and retail CBDCs that are exchanged directly between a nation's central bank and normal people, who would then have a digital wallet to hold their digital currencies.

The European Central Bank (ECB) is also actively exploring the potential of issuing a digital version of the euro – a CBDC. But the development is still in the early stages and it remains to be seen when, or if, such a currency will be issued.

The UK's consultation on crypto and digital assets

A recent consultation from the Treasury and the Bank of England stated that a digital pound would be designed for everyday payments by households and businesses, which has been described as being like cash, only in digital form, in the form of a ‘digital banknote’.

The consultation paper mentions four primary policy goals: to promote growth, innovation and competition, inform consumers of risks, maintain financial stability, and preserve market integrity. It also outlines guiding principles for regulation of crypto-assets.

In the document the UK government claims that it intends to remain technology-neutral, weighing both the potential risks and opportunities posed by blockchain technology and its use cases.

Watch: Fireblocks director and former fintech head of Bank of England talks about CBDCs and stablecoins