With Rishi Sunak in power, are we more likely to see a ‘Britcoin’?

Carlos León, Director, Financial Market Infrastructures & Digital Currencies Solutions at FNA, writes for Payment Expert on the increasing likelihood of Britain introducing a CBDC in the near future, with one of its main supporters being the Prime Minister himself, Rishi Sunak. 

In April earlier this year, the UK Government announced its intention to make the country a “global cryptoasset technology hub”. This package would “ensure the UK financial services sector remains at the cutting edge of technology, attracting investment and jobs and widening consumer choice”. 

Rishi Sunak, who held the position of Chancellor of the Exchequer at the time and was set to spearhead these initiatives, spoke about creating a “financial market infrastructure sandbox” that would enable businesses to experiment and innovate in cryptoasset technology. 

Often described as ‘crypto-friendly’, Rishi Sunak has never shied away from showing his support for cryptocurrencies and other digital assets, so much so that in 2021 he proposed that the UK economy develops and adopts its own Central Bank Digital Currency (CBDC), affectionately known as ‘Britcoin’, by 2025. 

At the time, the reception to Sunak’s proposals was somewhat mixed, with some maintaining that a CBDC would help the UK streamline the digital transaction process, while others expressed concerns about the potential impact on privacy, interest rates, and banks’ own liquidity. 

Eighteen months later, we have a crypto-friendly Prime Minister, which poses the question: how far up the agenda are Britain’s crypto initiatives, and are we likely to see Mr. Sunak accelerate the development of ‘Britcoin’ as part of the UK’s ambition to become a global hub for cryptocurrency technology? 

The importance of a well-balanced regulatory framework

Mr. Sunak’s ties to the corporate world mean he is very aware of the potential benefits of being crypto-friendly. There is a potential first-mover advantage in getting the crypto industry into jurisdiction. If the UK, or any country, is able to develop a well-balanced regulatory framework, in that it puts the crypto sector on a level playing field with the financial sector, that then could be crucial to attracting the crypto industry without compromising financial stability and consumer protection. 

This is particularly pertinent given the recent issues surrounding major crypto exchanges such as Binance, and the failure of Terra, Celsius, and FTX. One of the key takeaways has been the lack of regulation in the sector, so if there can be a country, such as the UK, that develops a well-balanced regulation, then the growing crypto industry could be attracted to that jurisdiction. In turn, this could give that particular country an edge in the sector, fostering such things as jobs, innovation, capital flows, and, ultimately, economic growth. 

Regulation, however, is key to its success. 

As Mr. Sunak’s position towards crypto and digital currencies will make a CBDC from the Bank of England more likely, I would certainly predict he will push the concept forwards. Nevertheless, we know the Bank of England and most G7 central banks understand that there is no clear first-mover advantage when it comes to rolling out a retail CBDC. 

Finding an adoption sweet spot for CBDCs

By its very nature, a retail CBDC is designed to be far-reaching and accessible for all, and to democratise access to a public digital currency. But it is also clear that central banks look for monetary sovereignty and a resilient payment system–not dependent on the same critical infrastructure, especially if foreign firms provide that infrastructure. 

The design of a CBDC should find the right balance between the motivations of the central banks and the use case; not only should a CBDC fulfil a central bank’s purposes, but it needs to be something that people find useful and want to use. 

In the Bahamas, where locals across many islands don’t have easy access to cash, digital access to the Bahamian Dollar–named the Sand Dollar – is deemed important in order for residents to transact, and store and protect their money amid natural disasters. However, the latest news from the Bahamas suggests that after one year the actual circulation of the Sand Dollar and the number of mobile wallets are still minor. 

The e-Naira, the CBDC issued by the Central Bank of Nigeria, has also suffered from a particularly slow adoption rate, with roughly one in 200 people across the country using e-Naira in the last twelve months; recently, the central bank has offered monetary incentives to push adoption forward.

 It is quite likely that central banks looking for a first-mover advantage have missed the needs of the end-user when designing the CBDC. Eventually, poor adoption of a CBDC creates a lack of trust in the central bank and the local currency and becomes a source of reputational risk.  

G7 countries could avoid the risk of poor adoption by declaring CBDCs as legal tender and offering attractive remuneration – among other potential incentives. Nevertheless, no central bank should pursue widespread adoption to the point where it creates complications for commercial banks to continue providing their everyday services and increases the cost of funds to the economy. 

A central bank ultimately needs to find, by design, the sweet spot between very low and very high adoption. 

At FNA, we have worked on a CBDC simulation model, by which we attempt to include many of the design options we know are available for central banks to be able to prototype and make a scenario analysis of which design works best in each case. Each time, we take into account the particularities of each country, including consumers’ and merchants’ habits, to study how the adoption affects the main macro-financial features of the economy.

Is a ‘Britcoin’ more likely with Mr. Sunak in power? Yes, absolutely. But the Bank of England is very aware that there is no first-mover advantage in developing a CBDC quickly. I am certain the Bank of England will focus on designing a CBDC that people love and use while serving its own motivations–most likely, monetary sovereignty and a resilient payment system–and minimising the potential threats to financial stability and privacy. 

The financial inclusion consideration

There is also another consideration for Mr. Sunak to ponder. With the FCA estimating that 1.3 million people in the UK do not have access to a bank account, it’s possible that the introduction of a digital pound could go some way towards further improving financial inclusion in the UK. 

However, with 96% of people aged 15 and over having access to a bank account, it is arguable whether the remaining 4% need or are interested in banking products. Still, with cash transactional use declining in several jurisdictions, a CBDC is one feasible way of providing people with access to another form of central bank money, to complement (not replace) the use of cash, without the need for a bank account. This is also a matter of monetary sovereignty and resilience of the payment system.  

In summary, it’s more likely but won’t necessarily happen sooner

Rishi Sunak’s appointment as Prime Minister means we are more likely to see the development of a digital pound, or ‘Britcoin’. But will plans be accelerated and will a CBDC in the UK become a reality sooner than originally planned, just because of a crypto-friendly Prime Minister? I’m not so sure. 

As outlined, user-oriented design and clear motivations must come before anything else. Britain will be far better if the Bank of England develops a digital pound that fulfils its motivations while people love and use it as part of their everyday lives. Trying to fast-track a CBDC to benefit from an uncertain first-mover advantage could ultimately end up in poor adoption or compromising the stability of the entire financial system, in both cases ruining the nation’s trust in its central bank and the local currency.