The UK is pressing ahead with a digital pound. James O’Malley investigates the potential upsides of a digital currency
Whether you’re a believer or not, it’s hard to deny that since the explosion of Bitcoin, Ethereum and other cryptocurrencies, we’re living through an era of significant financial innovation. From distributed ledgers to smart contracts and NFTs, crypto has pioneered new ways of doing business – for better or for worse.
That’s why the traditional banking system is worried. And it’s why central banks are starting to explore what their own Central Bank Digital Currencies (CBDCs) might look like. That includes the Bank of England (BoE), which recently published its thoughts on how to create Britain’s own “digital pound”.
It might sound like little more than press-release posturing, but there could be considerable upsides to Britain developing its own digital currency. And big risks if we don’t.
On the defence
As a starting premise, CBDCs have a defensive purpose – because whether central banks like it or not, digital currencies aren’t going away. It isn’t just crypto that’s threatening the BoE’s monopoly on money, either; other countries are experimenting with digital currencies, too.
“This is a really important once-in-a-generation shift in money,” said David Birch, a fintech advisor and author of a book called The Currency Cold War. “It’s important to the future of UK PLC to get it right.”
He warns against Britain jumping in too quickly, as other countries including India have arguably done. But he does worry that if Britain doesn’t develop its own digital currency it could lose standing as a major financial power.
“On the political side, you’ve got issues of national sovereignty and monetary policy,” said Birch. “Obviously it would be difficult to run a country if everybody in the country was using US digital dollars, because they were easier to use and because it was cheaper than mucking about with pounds. So, we don’t want that to happen.”
There are plenty of positive reasons to develop a digital pound, too. He points to the role a such a currency could play in terms of equity and inclusion – because if we can have digital wallets that aren’t connected to bank accounts, it will enable the 2.1% of UK adults who don’t have bank accounts to make payments in a world where cash is seldom used any more.
“Then you’ve got the p
