‘Britcoin’ offers exciting opportunities to modernise UK currency

This blog was co-authored by David Feltes, Managing Principal, Mark Profeti, Principal Consultant and Edward Pease, Consultant at Capco

Crypto assets continue to dominate the conversation about the future of currencies, payments and fiscal policy. The Bank of England and UK Treasury’s decision to explore the potential for a UK central bank digital currency (CBDC) – perhaps predictably quickly dubbed the ‘Britcoin’ – signals a desire innovate and provide efficiencies whilst maintain control over central bank money.

To successfully launch Britcoin, a very broad range of stakeholders will need to collaborate to shape and implement fresh government policy, regulations and supporting technologies. This will all need to be achieved without adversely impacting the existing financial services industry, a major part of the UK economy.

Outsized opportunities

There are a number of benefits that would arise from the creation of a UK CBDC. A digital pound would lower costs across the payment value chain, not only due to a reduction in physical currency, but also due to enhanced transaction efficiency. We would have greater cross-border efficiency and small businesses would pay less to existing payment providers, as well as avoid the potential risks involved in the daily physical deposit of notes and coins.

Money laundering and financial crime have the potential to be reduced, though this will be dependent on the controls put in place, traceability within the network itself and the measures introduced to police and punish illicit activity. Transactions in wholesale financial markets would leverage the security of a CBDC to move closer towards real or near-time settlement, reducing systemic risk and lowering costs.

CBDCs also provide a more efficient and effective way to distribute stimulus such as the UK’s COVID furlough schemes or the recent Biden administration stimulus payments in the US. Citizens who are underbanked, an estimated ~1-2M people in the UK, could benefit from government-supported access to the financial system.

In addition, Britcoin would enable the Bank of England to collate reams of real-time data on spending patterns and inflationary trends that would enable it to more efficiently manage monetary policy.

Unavoidable risks

There are also a number of manageable but unavoidable risks that would need to be mitigated for a Britcoin to be a success. Competition in the form of stablecoins such as other countries’ CBDCs is inevitable and may erode the UK’s ability to control its own currency, depending on consumer uptake.

We believe any CBDC scheme should involve commercial banks to add layers of control and limits on withdrawals. The biggest potential risk to a UK CBDC would be a run from Sterling to digital Sterling, which could freeze liquidity and impact lending and the real economy.

Britcoin’s security will be essential and any digital currency must be protected by robust encryption standards and protocols to avoid ‘digital heists’. As with credit cards, the Bank of England must develop protocols and partner with cyber security firms to deal with fraud at the point of engagement, as well as developing and implementing defined mechanisms for tracing and recovery of value. The Bank of England will also need to consider the risks of a digital pound as a vehicle for financial crime in the same way the 5th Money Laundering Directive addresses virtual currencies and attempts to provide controls and registration at the point of entry.

If a digital pound is fully adopted in place of the existing system, monetary policy could become tailored to individuals or specific groups, blurring the boundaries between fiscal and monetary policy. This would require new governance arrangements between the Bank of England and the UK government. The privacy question will be key. To what extent should the digital pound, particular in the retail channel, ensure privacy? There is clearly a trade-off between privacy and the control required to combat fraud and anti-money laundering.

Key dates and longer-term adoption

In our view, the opportunities presented by Britcoin outweigh the associated challenges and progress towards a UK CBDC is inevitable. The key driver is competition from private alternatives such as Bitcoin, as well as geopolitical competition from the likes of China, the US and the EU. The naming of a senior Bank of England official – Sir Jon Cunliffe, Deputy Governor for Financial Stability – as the head of the CBDC unit is to be welcomed and reflects the importance that is being attached to this project. 

We expect that the initial stakeholder engagement, both determining use cases and technology challenges, should be completed by the end of 2021. Requisite rules and regulations should follow in early 2022, with use cases rolled out by the end of 2022 or early 2023. Following any subsequent adjustments, we would expect to would see a launch and adoption of the UK CBDC during H1 2024.

Digital payments and crypto currencies are here to stay, and the Bank of England and the UK Treasury clearly recognise the imperative to adapt to maintain long-term relevance. London is one of the elite three global financial centres alongside New York and Shanghai, and ranks second to the US in global fintech funding (source: Innovate Finance UK). To preserve that position of influence, and the country’s broader global economic standing, the UK should move quickly to plan, trial and introduce Britcoin.