Virtual sterling? Bank of England ponders digital currency

Lucy Ingham 4 September 2020 (Last Updated September 4th, 2020 12:36)

The world of banking is poised for a step-change as many central banks ponder the introduction of a digital currency, and among those leading discussions is the Bank of England.

Virtual sterling? Bank of England ponders digital currency

The world of banking is poised for a step-change as many central banks ponder the introduction of a digital currency, and among those leading discussions is the Bank of England.

“We’re in the middle of quite a period of rapid change in money and payments,” says Simon Scorer, senior fintech specialist at the Bank of England, speaking at a talk hosted by the OMFIF Digital Monetary Institute.

“Technology advancements are creating new ways to save and to pay, and new forms of private money are on the horizon.”

For central banks, this takes the form of central bank digital currency (CBDC), an electronic form of money that the Bank of England – among many others – is currently exploring.

In March the bank launched a discussion paper outlining how a CBDC could help it evolve, particularly in light of the move away from cash that the UK has witnessed, and has called for proposals from organisations that could form part of this approach.

“Currently in the UK we, the Bank of England, provide the safest and most trusted form of money in the form of banknotes and electronic reserves, but households and businesses can only access this in the form of banknotes,” he says.

“So this raises a question for us around whether we should leverage these advancements in technology to provide a new form of electronic central bank money, i.e. a CBDC, as a compliment to cash that could be held by the public.”

Digital currency: Not a replacement for cash for the Bank of England

While the Bank of England is exploring the possibility of a digital currency, Scorer stresses that this would not be a replacement for cash, but instead broaden payment options.

“We see CBDC as being not a binary decision,” he says,

“CBDC would sit alongside cash, but it would also need to sit alongside private sector payment development. So finding that that space for CBDC is one the important questions and challenges that we need to answer.”

Benefits of a CBDC

The Bank of England is one of a host of central banks around the world that is pondering a digital currency, but Scorer highlights that the reasons for doing so vary widely.

“Motivations and circumstances will vary quite dramatically from country to country, and jurisdiction to jurisdiction,” he says.

“There may be quite a different set of motivations coming out of different parts of the world. For example, financial inclusion could be a really big motivator in certain parts of the world. The decline of cash is more advanced in some places and others, the capabilities and deficiencies of existing infrastructure are varied.

“So all of these kind of lead to quite a different set of circumstances in each jurisdiction.”

For the Bank of England, however, a digital currency provides opportunities across “monetary policy, financial stability, payments”.

“Some of these are around supporting a more resilient payments landscape, avoiding some of the risks of private money creation, supporting competition, efficiency and innovation in payments,” he says.

“A particularly interesting one from a technology point of view around helping to meet future payment demands in a digital economy.

“So creating a wider set of products, maybe this could lead to micro-payments, the use of smart contracts and ultimately, running through this, providing a safer continued access for the public to a risk-free form of money to  compliment cash as a digital alternative.”

While the Bank of England is exploring a digital currency, however, there is no guarantee that it will implement one; it may ultimately decide a different approach is better for digitisation.

Nevertheless, with such potential of CBDCs, it is continuing to explore the technology with a serious eye on the future.

“We haven’t got all the answers yet,” says Scorer. “And we’re still working through a lot of issues.”


Read more: Central bank digital currencies: A step-change in finance