For a while now, central banks worldwide have been spooked by the rise of cryptocurrencies, not least by “stablecoins” that are pegged to the value of a fiat currency, like the dollar or pound.
One major worry is that these stablecoins, which people could use to circumvent international currency controls and sanctions, might supplant real-world currencies, thereby weakening the power of central banks to control fiscal and monetary policy. When the company formerly known as Facebook launched Libra (its now-defunct stablecoin) in 2019, the worry only grew.
It didn’t take long before dozens of central banks worldwide, including the European Central Bank and the People’s Bank of China, began piloting riffs on stablecoins with central bank digital currencies (CBDCs), which would be digital versions of currencies already in circulation.
In February 2023, the Bank of England (BoE) joined these banks, releasing an extensive joint consultation paper, co-authored with the UK treasury, outlining plans for its own CBDC.
The BoE predicted that the digital, pound-pegged currency, dubbed “Britcoin,” was necessary and would be widely available by the end of the decade.
Such an innovation could upend centuries of accepted monetary policy, but the jury’s out on whether it could work or if it’s even a good idea.
What Purpose Would It Serve?
It might not be obvious why we might want a CBDC—isn’t currency already largely digital these days? Why create a new “digital pound” at all?
The problem, the BoE contends, is that cash is on the wane in the UK—it comprises only 5% of the money Britons hold for spending—and digital bank balances don’t quite replicate the peer-to-peer qualities of an old-school banknote.
There are too many intermediaries involved in a basic transaction; you can’t just ping £5 phone to phone without it going through some complex system of banking controls.
A world that has been largely digitized, the BoE says, locks people out of the system if they don’t have a bank account (a claim that many cryptocurrency issuers have also made), and also makes it harder to execute spontaneous transactions among, say, friends or family members.
The digital pound would ostensibly capture this peer-to-peer quality, though the intention is not to supplant cash—merely to complement it as it disappears from common usage.
The BoE has also speculated that the digital currency will be a boon for businesses, which will be able to move money with less friction, and that it will help plug the gap between state and public money.
But the BoE is still a little murky on the specifics.
A Core Contradiction
While it remains unclear how exactly Britcoin would work, it will almost certainly deviate from existing stablecoins in one major way: It wouldn’t use blockchain.
Think about it: A bank-issued currency has to be issued and ultimately controlled by a bank. Unlike Bitcoin, whose issuance is determined by thousands of independent nodes operating in tandem, a digital pound would have to reflect the intentions of a single central bank—decentralization is only a hindrance here.
The technology is also unfeasible for the scale and speed at which the BoE wants the digital pound to operate. For instance, the BoE says it aims to facilitate 30,000 transactions per second (tps)—contrast that with Ethereum’s 15-20 tps.
As the digital pound technical spec says, “Distributed ledger technologies and blockchain-based solutions might have advantages in guaranteeing consistency and resilience, but they also present privacy, scalability and security challenges.”
The BoE’s plan, then, is to use a “centrally governed, distributed database”—which has its own problems.
How, for instance, can the BoE guarantee that it won’t censor or surveil transactions, which would undermine the digital pound’s role as peer-to-peer “cash”?
In truth, the BoE has not really addressed this question—it admits that it is still figuring it all out as it goes along.
It has, however, offered some ideas, such as designing the system to support the “rapid adoption” of new cryptographic algorithms, guaranteeing security, and allowing companies to build second-layer interfaces offering different levels of privacy and security.
There is also the worry that “Britcoin” could have severe economic ramifications down the line.
Consider how volatile crypto is and how prone that market is to tampering, hacks, and unforeseen calamities.
Unlike crypto, however, Britcoin would not be part of a largely self-contained ecosystem where the damage is limited to other crypto investors. Instead, problems with the digital currency would bear on the stability of an entire nation—not to mention the many foreign people and institutions that hold the pound.
One major fear along these lines is that a digital pound, if successful, could motivate people to withdraw their funds from banks and maintain them instead in their “Britcoin” wallets. Doing so might lead to insolvency at banks—and potential runs on their reserves, followed by economic collapse.
As one critic has pointed out, the digital pound would not necessarily benefit “financial inclusion” either. Given that the digital pound would have to be designed to limit illicit transactions, Britcoin wallets would likely require users to go through “Know Your Customer” checks—one of the critical existing hurdles to financial inclusion.
The proposed £20,000 limit on Britcoin balances could also encourage people to spend too quickly.
The BoE says that Britcoin will probably be available by the end of this decade, having judged it “likely” that such a currency is necessary. It believes it will be able to begin development in earnest after 2025.
The project may stall, however, as not everyone shares the BoE’s conviction. “We have yet to hear a convincing case for why the UK needs a retail CBDC,” said one parliamentary committee, dismissing the digital pound as “a solution in search of a problem.”