The introduction of a digital pound is an opportunity to reform the financial system and make finance more accessible and inclusive.

What is this article about?

The article examines the case for a digital currency, analysing the Bank of England’s consultation and discusses the introduction of a digital pound could be an opportunity to reform the financial system.

Why is this important?

The way in which a digital pound is implemented will determine how accessible it is, particularly the elderly or those on low-incomes, and whether or not it reduces the fragility of our financial system.

What’s next?

The Bank of England and the Treasury intend to continue to design and develop the digital pound model with a view to its likely introduction.

As less and less people rely on and use cash, policymakers are increasingly exploring the potential for central bank digital currencies (CBDC).

The Bank of England (BoE) issued a consultation paper setting out the case for a ‘digital pound’ earlier this year. It stated: “The decline of cash and reliance on private digital forms of money risks vital payments systems becoming increasingly inaccessible, especially to those without bank accounts or who struggle with digital payments, and risks making the money and banking system increasingly fragile.

“Without cash, the public would only be able to make payments through the private banking system, whether directly or indirectly,” the BoE highlighted, adding that relying on private banks could ultimately result in a large number of people who are “financially excluded or exploited”.

According to the BoE consultation document, 1.2 million adults (2.3%) in the UK did not have a bank account in February 202, with 5.4 million (10%) still using cash on a daily basis.

Thus, a digital pound would be risk-free, publicly issued money made available to households and businesses, alongside physical cash.

In its response to the consultation The Payments Association stated: “Financial inclusion must take into account digital inclusion, and the focus should be on all categories of people, from the elderly (many of whom struggle with advanced technology), vulnerable people, people with disabilities, and of course those who live in remote areas with poor technological infrastructure.” Hence, the trade body would like to see solutions that have been used in Africa, India and China reviewed.

In addition, the association said: “[…] Our members believe it is key that the Bank [of England] works with international standards setting bodies to deliver a solution that is harmonised, so far as is reasonable and practicable, on a global basis to enable the best cross-border solutions alongside national ones.”

Reform proposed

Positive Money, a not-for-profit, advocacy group promoting reform of the money and financial system, recommends the BoE create and hold a digital currency.

Payment and customer services could be operated through Digital Cash Accounts (DCAs) provided by private sector firms as well as trusted public sector institutions such as the Post Office.

This would alleviate concerns around accessibility and inclusion, while also enabling a basic digital pound option that is free and does not exploit user data.

Simon Youel, head of policy and advocacy at Positive Money, explains: “Our fear is that relying on the private sector could reinforce existing barriers to inclusion, as profit-maximising firms will have little incentive to make their services inclusive to low-income customers, and users may be forced to hand over fees or personal data to access the digital pound.

“Banks are generally against the digital pound, as it would disrupt their oligopoly over the electronics payments system that gives them a deep supply of cheap funding via deposits, which is the source of their huge profits,” he adds. “A digital pound could have profound consequences for banks’ business models, ranging from injecting more competition to making banks redundant for payments.”

Adnan Chowdhury, UK and MEA policy lead at Wise, a fintech specialising in international payments for people and businesses, warns that if the digital pound is not accessible to everyone

then it will not be the “cutting edge financial innovation that it has been promised to be”.

“For us, we would need to see government making it a priority to focus resources on international payments, and to work on connecting the individual CBDC payment systems,” he adds. “Otherwise, they run the risk of reverting to a financial system characterised by domestic isolation.”

This sentiment is echoed by the Payments Systems Regulator (PSR). A spokesperson from the watchdog, told Payments Intelligence: “We know that some people in the UK don’t have access to digital and financial infrastructure, such as adequate broadband or a bank account, and we want to make sure this digital divide doesn’t deepen as payments evolve.”

This is why the PSR wants an offline digital pound to be considered, as it would “deliver beneficial resilience effects for the payments ecosystem as a whole, providing a contingency for payments to still take place in the event of no data connection,” they add.

Control of money

Saule Omarova, a Beth and Marc Goldberg Professor of Law at Cornell University, argues that what is at stake in the debate about a digital pound is not simply the speed or form of the payments system, but control of the creation and allocation of digitised, tokenised sovereign money.

It’s really about “who gets control of this digitised new form of money”, she says.

Omarova, who was President Biden’s nominee for US Comptroller of the Currency in 2021, believes the introduction of a digital pound offers a chance to correct the inherent instability of a modern banking system where two critical functions; money creation and credit allocation, are publicly subsidised, yet provided by private institutions for private profit.

“So, despite the increasingly complex technical regulation, it does lead to recurring crises and results in this persistent pattern of socialising losses and privatising gains,” she explains.

Omarova, therefore favours direct CBDC. She says: “[It] is the more effective tool in preventing the loss of the public’s ability to control money and finance. It can truly be a sovereign digital money, not simply a government-run payments channel on the backend of private credit money creation and allocation.”

As the BoE and Treasury decide when and how to implement any digital pound project, regulators continue to engage with them.