Why The UK Treasury Is Pushing for the Digital Pound

Abhinav Raj, Writer
@uxconnections

Central bank digital currencies (CBDCs) are on the rise across many developing and developed economies of the world. The UK government is considering following suit with its own “digital pound” stablecoin. But why?

The government of the UK is considering launching its digital version of the pound, called the “digital pound”, as stated by Andrew Griffith, the economic secretary to the Treasury, in a statement to MPs on Wednesday.

Over the past few years, the world has witnessed rising interest in central bank digital currencies (CBDCs)—a digital form of fiat currency produced by central banks of the country. 

According to the Digital Pound Foundation, approximately 114 countries representing 95% of global GDP are currently exploring the implementation of a central bank digital currency (CBDC) as of 2023. Of these, 60 are in an advanced stage of development, pilot or launch, with 11 having fully launched a CBDC.

While this rise in CBDCs can be attributed to the unique policies, geopolitical motivations and technological standing of countries introducing them, there are some shared advantages to the adoption of centralized digital currencies. 

One of the most significant advantages of CBDCs is their ability to promote financial inclusion. By providing access to digital financial services to marginalized groups, such as those residing in rural areas or low-income individuals, CBDCs can help bridge the gap between the “banked” and “unbanked” populations.

Image: Paul Silvan on Unsplash

According to published research by the UK Financial Conduct Authority, about 1.3 million UK adults do not hold a bank account. 

The introduction of a centralized digital currency can help the unbanked population participate in digital transactions by lowering the barriers to entry for digital financial services. Through accessibility and convenience for all individuals, CBDCs can ascertain increased economic participation and socio-economic empowerment for those currently excluded from the financial system. 

Furthermore, the increased participation of unbanked individuals in digital transactions has the potential to reduce fraud and money laundering by providing transparency and traceability in transactions. Additionally, CBDCs can provide sovereign alternatives for digital payments, as it is issued and backed by the central bank, which can lower the dependence on foreign digital payment systems, and increase the security and resilience of the national payment infrastructure.

CBDCs are fundamentally different from other digital currencies such as Bitcoin or Ethereum in several ways, but one of the most notable differences is the aspect of volatility. 

Cryptocurrencies are decentralized, which means that they are not backed by any central authority or government institution. They rely on market forces to determine their value, which can lead to significant fluctuations in their price.

Image: Clay Banks on Unsplash

CBDCs, on the other hand, are issued and backed by central banks, and their value is directly linked to the fiat currency they are based on. This means that CBDCs do not experience the same level of volatility as cryptocurrencies and tend to be more stable in value, and are hence known as ‘stablecoins’. This stability makes them more suitable for use in day-to-day transactions. 

It remains to be seen what the UK government’s verdict would be on a centralized digital currency. However, it would be a welcome step as it has the potential to bring several benefits such as the potential for improved monetary policies, increased financial inclusion, improved data privacy and security, and facilitation of international trade and cross-border payments. 

Let us know your thoughts on a prospective ‘digital pound’ in the comments below.