March 14, 2023

Digital Pounds - Part 1: Introduction of a new CBDC

Last month, HMT and the BoE released a consultation on The Digital Pound, a Central Bank Digital Currency (CBDC) that would allow individuals to hold money as a direct claim on the central bank, like banknotes. Up to this point CBDC has only been available to some financial institutions, like banks, where they are known as reserves. In contrast, all electronic money held by individuals is actually a promise made to them by a company (again, usually a bank) that they will be repaid, rather than a promise by the central bank itself. The exception is certain cryptocurrencies, which is one of the reasons for their rise to prominence. For the most part, the exchange of private money, that is claims on banks, for goods and services causes no issues; we all trust that we can exchange these claims for cash whenever we choose to do so. However, with banknote use in freefall, HMT and the BoE worry that this link between government, or public, money and our daily lives will be severed. The Digital Pound is the first step of their proposed response. 

The consultation paper reads like HMT have decided to progress with the scheme and now need to go through the process of seeming to weigh up options. No decision has yet been taken, but the consultation includes plans for next steps — just in case. Some risks are considered and there is real analysis to differentiate between different models of CBDC. Nevertheless, HMT have made almost no effort to present the case for why government might not wish to do this, or even anticipate the challenges that such opponents might make. The biggest challenge, the impact on bank balance sheets and financial stability, is buried in Annex 2. 

Instead, the 116 pages weave together description, advocacy and mild boosterism without truly stating what seem to be the underlying motives: this is exciting and new and, please, we want to stay relevant. 

This is Part 1 of a submission in response to HMT’s and BoE’s public consultation. Part 2 is available here.

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