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Transforming transactions with the digital pound – Is this the future?

The Bank of England and HM Treasury have presented a consultation paper to Parliament entitled: ‘The digital pound: a new form of money for households and businesses?’

The consultation signifies the next stage in the development of a digital pound, where its feasibility will be evaluated, and a technical plan for its execution will be formulated. But no decision is imminent. Currently, the Bank and Treasury believe that a digital pound will probably be necessary by the end of this decade. Meanwhile, feedback on the consultation is welcome until 7 June 2023. A final decision is expected on this phase of development in 2025/2026.

The consultation paper addresses the emergence of new technologies and new forms of digital money and new devices as a means of payment, ensuring that the UK can retain its place as a global leader in finance both domestically and globally. The Government and the Bank of England wish to ensure that the UK remains at the forefront of innovation in money, payments, and financial services.

Thus, the idea of a ‘digital pound’ has been conceived, marking a technological milestone. Available for households and businesses, the digital pound will be denominated in sterling and will be available for everyday use. It is expected however, that the digital pound will complement rather than replace traditional cash.

The consultation paper examines a proposal for a retail and wholesale digital currency. The model for a digital pound will pivot around a public-private partnership, known as the ‘platform model’, the key features of which will include:

Publicly issued digital money: The Bank of England will control the core ledger and the infrastructure for issuing digital pounds.

Private sector wallets: Private sector firms (banks or non-bank payment services providers) will provide the infrastructure between the Bank and Payment Service Users (PSUs) through the use of e-wallets and smart cards. Payment interface providers will be required to identify and verify users, but also anonymise personal data where required. Therefore, a full understanding of and full compliance with the UK GDPR and Data Protection Act 2018 will be key!

‘Pass through’ basis: E-wallets will act as an interface only, with all digital pounds being held by the Bank. PSUs will not have a claim on the wallet-holder in the same way they do for a deposit account, and this arrangement would not represent a custody arrangement.

No Interest: Like traditional cash, the digital pound would be a direct claim on the Bank and will collect no interest – it’s not designed as a saving mechanism.

Spending limits: Spending limits are expected to be imposed (£10,000 - £20,000 per person), which is expected to suffice for the majority of payment transactions whilst preventing risks to retail bank deposits.

The introduction of the digital pound will be a major project involving key stakeholders in both the public and private sectors, supporting the safety and interchangeability of money and encouraging choice, competition and innovation. Importantly, this new form of currency will be subject to high standards of privacy and data protection, along with robust regulatory requirements.

Author - Lorraine Mouat (Head of Payment Services)