On 19 April 2021, as part of the UK's Fintech Week, the Bank of England and HM Treasury announced the creation of a taskforce to explore a central bank digital currency (CBDC) in the UK, since dubbed ‘Britcoin’. This follows from the Bank of England’s discussion paper on CBDC published in March 2020 but is different to HM Treasury’s recent consultation on cryptoassets.

In this blog post, we look at how Britcoin might work, why it might be introduced and some of the risks associated with a UK CBDC.

How might Britcoin work?

Britcoin would transform the form of money provided to the UK public and the country's payments infrastructure.

Currently, only commercial banks and certain other financial institutions can hold electronic central bank money. The public can only hold money issued by the Bank of England in the form of banknotes. A CBDC would create a direct relationship between the public and the Bank of England by allowing households and businesses to directly make payments and store value with the Bank of England in the form of an electronic currency. This is a retail rather than wholesale proposal.

Britcoin would be quite different to Bitcoin, Dogecoin and other cryptoassets, which are typically:

  • privately issued;
  • not backed by a central party; and
  • not considered money because they do not perform the essential functions of money.

In some ways, Britcoin would be more similar to stablecoin (broadly, a class of cryptoasset that is privately issued and whose value is linked to another asset). However, Britcoin would not be entirely the same because it would be issued and backed by a central bank rather than a private party.

Another crucial difference is that, unlike stablecoin (which, if widely used, would in effect enable a private entity to create digital ‘money’), a CBDC would enable the Bank of England to maintain control over the money supply. In that sense, a CBDC is sometimes thought of as equivalent to a digital banknote, although in practice it may have other features depending on its final design.

Under the proposals, if a CBDC were to be introduced in the UK, it would be denominated in pounds sterling, so £10 of CBDC would always be worth the same as a £10 banknote. Any CBDC would be introduced alongside – rather than replace – cash and commercial bank deposits.

Why Britcoin?

The financial world is becoming ever more digital: many businesses and individuals are accustomed to making electronic payments and cash use is in decline.

As banknotes and reserves are integral to the central bank, these trends may impact the Bank of England’s ability to achieve monetary and financial stability. A new digital currency is one way to tackle this.

A CBDC will also bring opportunities for the financial system, including:

  • helping to facilitate future payment needs, such as ‘programmable money’; and
  • enabling cross-border payments in an increasingly globalised world.

The risks of Britcoin

The introduction and structure of a UK CBDC needs to be very carefully considered. It will not be possible to create a perfect system: the Bank of England has said it would need to make careful choices about which of its design principles to prioritise, and the optimal trade-offs between them.

For example, the Bank of England has noted that a CBDC would only have benefits if households and business actually hold it and use it to make payments. Conversely, if households and businesses decide to transfer their money from banknotes and commercial bank deposits on a large scale, this may have significant implications for the structure of the banking system.

There are also concerns about privacy as a CBDC makes it easier for governments to view transactions.

A cautious design of the UK CBDC will be crucial to mitigate risks to the financial system. The Bank of England has many options at its disposal, including whether or not Britcoin will be:

  • interest-paying;
  • distinct from, and convertible to, reserves;
  • universal or restricted to a particular set of users;
  • anonymous (cash-like) or identified (like current accounts); and
  • provided in part by the private sector.

It is worth noting that despite the creation of the taskforce, the Bank of England has not, at this stage, made any concrete decisions on whether or not to introduce a CBDC. But the regulatory headwinds suggest that this is very much a space to watch.

You can read more of our thoughts on this and other fintech trends in Chambers and Partners' UK Fintech 2021 report.