As the UK continues its active approach into the viability of a digital pound central bank digital currency (CBDC) after releasing a consultation on the matter last February, Aleks Stefanovski – Chief Strategy Officer at Currencycloud, writes for Payment Expert on what the digital currency could offer. 

In a February 2023 consultation paper that looked at the possibility of a UK CBDC, the Bank of England and HM Treasury concluded it was “likely a digital pound will be needed in the future”. The UK central bank is reportedly hiring a 30-strong team to work on the controversial project.

Some valid concerns exist: if developed without appropriate checks and balances in place, a digital pound could pose serious privacy issues. Moreover, without carefully designed limits on CBDC deposits, consumers could flock to fail-safe central bank accounts during financial crises – potentially leading to destabilising runs on conventional banks.  

But CBDCs offer a lot of promise, too. For example, blockchain adds additional ‘visibility’ to transactions – meaning transactions could be tracked and verified with more detail than is currently possible. This would reduce the need for intermediaries, improving the speed and efficiency of domestic payment settlement.

If central banks were to develop shared interoperability standards and connect their domestic digital currencies, the same principle could be applied to cross-border payments and foreign exchange. 

While there are hurdles to cross, test models by networks such as Visa and SWIFT, as well as initiatives sponsored by the Bank for International Settlements, look positive. 

If we were to combine these “atomic” transactions (between the domestic CBDCs of different countries) with anti-money laundering technology and other automated compliance processes, a future of near-instant, very low-cost cross-border payments would not be beyond the realms of possibility.

A CBDC would also act as a fertile testbed for financial innovation across the private and public sectors, with innovative companies building CBDC-related solutions and the government finding novel ways to make outdated processes more efficient. For example, the Bank of England has discussed the feasibility of ‘micropayments’, automatic tax payments at the point of sale, and automatic dividend payments to shareholders.

A ‘Britcoin’ network that exists in parallel to the conventional UK payments network could also enhance the resilience of the overall financial system, as both would offer a backup should either be disrupted by human error or malicious actors.

For the avoidance of FoMO

Fear of missing out is never a good reason to do something. But there are plenty of good reasons to believe CBDCs offer a valid alternative to the status quo. 

Done right, they give us the opportunity to build better payments infrastructure and set the stage for a world of innovation.