The Treasury and the Bank of England are planning a “digital pound” which could be launched by the end of the decade.
It could begin to replace banknotes and coins amid a continued decline in the use of cash.
Efforts by the government and the Bank of England to consider launching the digital pound come amid fears about massive technology competition in the currency.
But what exactly is a “digital pound” and how it would work. Here the PA news agency answers these questions.
What is a digital currency?
A digital pound would be a currency that doesn’t exist as physical money, such as notes or coins.
It exists only as an amount on a computer or similar device.
However, the Treasury and the Bank of England have stressed that a digital pound would equal the same value as a physical pound coin.
A central bank digital currency (CBDC) is digital money that can be produced by a central bank, such as the Bank of England.
Is it the same as cryptocurrency?
No. A cryptocurrency is privately issued, by a company like Bitcoin, and therefore not backed by a central bank.
Since most cryptocurrencies cannot be used to buy assets extensively, they are viewed primarily as private investments, which can rise and fall in value as more people buy or sell cryptocurrency.
Cryptocurrency values can fluctuate dramatically, and there has been a recent collapse in valuations, following a pandemic boom in demand for cryptocurrencies and the recent crash of cryptocurrency exchange FTX.
Why could it be launched in the UK?
Right now, the need for a digital pound is limited as people use their debit cards, phones or even watches to perform the same function.
However, there are fears that people may choose to trust big tech or other private sector companies for their money more than the state. Many have speculated that you could see the equivalent of Amazon or Facebook with their own version of pounds.
But unregulated digital currencies could fragment the pound system, meaning £1 might not be exactly worth £1 everywhere.
A CBDC would aim to offset their concerns, by being designed to “be reliable and retain value,” according to the Bank of England.
How could I access it?
The CBDC would be issued and held by the Bank of England, rather than a private institution or bank. The user would then store the money in a “digital wallet”.
However, an intermediary, such as a consumer bank or e-commerce company, would be needed to spend the money.
How would it be used?
Exactly how it is used could be changed during the design phase, but the intention is for it to be used in a broadly similar way to a bank account.
A computer, phone or other device would be used to transact the digital currency and would be dealt with normally by shops or other businesses.
However, the Bank of England said it would be for spending by customers, rather than saving in an account.
How much could I own?
Assuming the UK CBDC gets the green light, UK users would initially be capped at how many people could be released.
The Treasury also said any digital pound would exist alongside, rather than replace, cash and bank deposits, meaning people could continue to own cash if there is still demand.
The House of Lords has previously signaled concern that there could be financial instability if households or businesses all look to withdraw money from commercial banks into a state-backed CBDC all at once.
When will it be launched?
The Bank and Treasury have stressed that there is no certainty it will be launched.
A four-month consultation was launched on Tuesday, which will be followed by a long planning period.
A final decision is expected to follow the planning period from 2025 at the earliest. It could therefore be launched for the first time in the second half of the current decade.
Do other countries have digital currencies?
The UK plans are the latest in a series of countries considering CBDCs.
The Atlantic Council estimated in December that at least 114 governments were exploring CBDCs, with nearly 30 governments either having initiated or initiating pilot schemes.
China began public testing of its digital renminbi in 2021.
CBDCs are also on the rise in the Caribbean, with programs launched in the Bahamas and Jamaica designed to improve financial inclusion and crack down on money laundering.