UK Joins Race to Develop A Central Bank Digital Currency

The Bank of England has announced its plans to develop “Britcoin,” but how will it be used and what are its potential benefits to business?

The Bank of England and HM Treasury recently announced plans to create a Central Bank Digital Currency (CBDC). This is potentially the first step for a digital currency issued by the Bank of England that would exist alongside cash and other payment methods, rather than replacing them outright. 

But how exactly would this new currency function, and how could it benefit businesses and consumers?

Britcoin joins the global CBDC race

Central banks around the world are growing concerned at the pace of innovation among blockchain technology and the rate at which financial institutions are adopting cryptocurrencies. Nicknamed “Britcoin,” the UK is the latest to join the global race to develop CBDCs.

Wall Street players and other major institutions from Tesla to Visa are exploring ways to enable institutional investments and consumer payments using cryptocurrencies. News of Britcoin came just days after Coinbase—the largest cryptocurrency exchange in the US—went public. Chancellor of the Exchequer Rishi Sunak announced that Britain “need[ed] to go further” to stay at the forefront of financial innovation.

Why are governments developing CBDCs?

CBDCs are still in development around the world. As such, they have no standard definition or proven use cases. Britcoin is in its very early stages. A task force is exploring the potential a CBDC could hold for the UK government and economy, but no decisions have been made yet whether to go ahead and develop one.

Central banks are developing CBDCs to retain control over monetary policy, especially as cryptocurrencies are increasingly used for payments and transactions: a financial realm where central banks have no jurisdiction or leverage. Cash use is falling as well, with debit cards overtaking cash for payments in 2018, hinting at an additional incentive to develop Britcoin.

Governments are focusing on using CBDCs as digital payments systems that are distinct from commercial banks and payments vendors, such as Visa and Mastercard, that use national currencies and profit from transactions via their networks. Consumers may eventually hold digital accounts with their nation’s central bank and use digital tokens for everyday transactions in the same way they use cash.

Britcoin: benefits to consumers and a threat to banks

A UK CBDC would not be like other crypto assets—such as Bitcoin or Ethereum—that fluctuate in value compared to national currencies in any case. Britcoin would be legal tender and £10 of it would be equal to holding a £10 note. The potential benefits of introducing a CBDC include ensuring the public has access to a source of money, lowering the cost of transactions, and protecting consumers from financial instability. People may keep savings accounts in Britcoin at the BoE as well, instead of depositing them with private financial providers.

There could be unwelcome downsides for some, however. The lucrative fees commercial banks charge for acting as intermediaries for transactions could evaporate if CBDCs are adopted. Consequently, a successful Britcoin rollout may spell smaller balance sheets and reduced profits for high street banks.