In an environment where cryptocurrency is gaining popularity, certain institutions have already expressed interest in digital currency, such as Ethereum or the Binance coin. According to Treasury and Bank of England plans, Britain could launch a digital currency known as "Britcoin" within the next decade. Anika Sidhika writes

In response to the rise of privately issued cryptocurrencies and stable coins, the government has launched a four-month public consultation process. It builds on an initial taskforce established by Rishi Sunak in 2021, when he asked the Bank of England to investigate the case for a central bank-backed currency.

The currency, backed by the central bank, would be "reliable and retain its value over time”, as opposed to cryptocurrencies, which can fluctuate dramatically and imperil investor holdings, according to the Bank of England's website.

That industry has been particularly volatile in recent months, fuelling calls for increased regulation. Last year's crypto crises sank assets, and the multibillion-dollar collapse and bankruptcy of crypto exchange FTX in November spurred fraud accusations against founder Sam Bankman-Fried.

For two compelling reasons, the government is considering the introduction of a digital pound. The first is that other countries are investigating the development of this technology, and the private sector may also participate with stable coins, which are comparable to crypto assets but are linked to the value of existing currencies such as Bitcoin.

According to the Atlantic Council, more than 100 countries have thought about using digital currency that is issued by central banks. Following on from Indonesia's work on a digital rupiah prototype and Ghana's e-cedi pilot programme, Sweden has been working with Accenture on an e-krona. Eleven countries, including Jamaica and The Bahamas, have already implemented central bank digital currencies.

The Bank of England is correct to be concerned that new types of monetary value, such as this, may erode its grip on the financial system and impair its ability to guide the economy.

The rationale is that a digital pound might improve the payments system, allowing businesses and consumers to conduct faster, cheaper, and more intelligent transactions. Micropayments for services may be possible with a less expensive, more automated payment system, opening new business models.

The proposed digital currency would be denominated in pounds, with 10 pounds of digital currency equalling a 10-pound note. The currency, which is kept in a digital wallet, could be used to make electronic payments for goods and services.

Proponents of central bank digital currencies believe that they facilitate and reduce the cost of digital transactions, as well as increasing access to the financial system by allowing those without bank accounts to utilise them.

Advantages of cryptocurrency

Speaking to Private Banker International, Ian Taylor, head of crypto and digital assets at KPMG UK, says: “In an increasing digital society, the UK needs to keep pace with the speed of innovation that’s happening in the payments sector. The Bank of England’s consultation into a proposed CBDC is a sensible approach to keep the UK at the forefront of technological change without committing yet to the substantial investment that would be needed to roll out a digital pound.’’

One new trend that has linked cryptocurrencies to the mainstream financial sector is central bank interest in the phenomena, for both positive and bad reasons. What could possibly be a disadvantage?

Peter Harmston, Partner, and UK head of payments at KPMG UK, adds: “The benefits and challenges of introducing a digital pound need to be carefully considered. There are a number of factors that need to be taken into account including the fine balance between the inevitable decline in physical cash, the importance of ensuring as an economy we are being financially inclusive and the current lack of consumer protection in the digital assets market.”

In the context of anti-money laundering and criminal financing, central banks and other regulators have highlighted worries about the anonymity of cryptocurrency use. Despite its problems, do banks believe cryptocurrency is credible?

“Not all crypto assets are the same. Unbacked assets are highly volatile, and their value can drop to zero. Even some stable coins have dropped to zero. That said some asset backed, fiat backed, and algorithmic or decentralised currencies have maintained their peg during highly stressed periods. Finally, as many of the activities and entities will shortly fall into the regulated perimeter, this will lend some levels of credibility to what in the end is only technology,” Taylor clarifies.

A digital pound is not without risk. The impact on the financial industry is significant. But how will this affect the entire United Kingdom as a whole?

‘’It’s difficult to say given we are still a few years off until trials commence,’’ Taylor explains. ‘’The government’s objective is to ensure we are innovative and continue to lead the world on payments.”

Even while it is expected to provide the necessary infrastructure for a digital pound, the Bank of England is not indicating that it will directly engage with customers. People will instead store their "Britcoin" in wallets provided by financial intermediaries who also store their data; neither the Bank nor the Government will have access to these wallets.

However, have banks looked into digital currency technology and security issues to see if Britcoin is a good investment?

"It was always a purely speculative asset," says Andrew Haslip, Head of Content for Asia Pacific, GlobalData. ‘’According to our 2022 Global Wealth Managers Survey, is that it’s going to give good returns (capital appreciation 36.1%), and as a store of value 28.1%.  Neither of which applies anymore, the future will really depend on the crypto exchanges becoming more tightly regulated and more reliable as financial partners.’’

Former Bank of England Governor Mervyn King, who is currently a member of the House of Lords, has stated that a digital pound would have "risks but no obvious benefits”.

Financial inclusion concerns

Although the Bank of England does not claim that "Britcoin" will replace cash, it is undeniably another step towards the digitalisation of banking, which has the potential to exclude those who are less tech-savvy.

Authorities are very interested in several reasons. As the digital revolution rolls on, and countries compete with each other to take market share in the growing tech sector (including fintech) governments, and central banks want to be seen as being innovative.

Despite its controversies, do banks believe cryptocurrency is trustworthy?

“Not all crypto assets are the same,’’ Mr. Taylor discusses. ‘’Unbacked assets are highly volatile, and their value can drop to zero. Even some stable coins have dropped to zero. That said some asset backed, fiat backed, and algorithmic or decentralised currencies have maintained their peg during highly stressed periods. Finally, as many of the activities and entities will shortly fall into the regulated perimeter, this will lend some levels of credibility to what in the end is only technology.”

Another reason of interest is being more practical. The use of cash has been dropping sharply in recent years, and this process has accelerated even further during COVID 19 crisis due to handling notes and coins. Yet, it is important for the financial system to provide a means of payment that is accessible to all.

The Bank of England will provide us a lot more details on how the digital pound is developing, but the market's readiness for this change is still an open subject.

‘’Though there is a lot of volatility in the market, the HNW investors only ever devoted a tiny portion of their wealth to crypto, so it won’t impact these big players much at all,’’ Haslip recognises.

Many aspects of society have been profoundly altered by recent advancements in communications, data processing, storage, and encryption. Furthermore, considering that money and payments are all about data management and communication, it is unsurprising that such advances are putting a pressure on the banking system. While our current system and the protocols it uses have evolved over time, its fundamental structure dates back to the internet. Hence, even though digital currency is not new, it is critical to re-evaluate our institutional framework to determine whether and how it should adapt in response to the changing environment and, of course, societal needs.

"Will “Britcoin” bring legitimacy to cryptocurrency in the UK?" was originally created and published by Private Banker International, a GlobalData owned brand.

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