The UK will probably impose a limit of £10,000 to £20,000 ($12,017 to $24,033) for holdings of a new digital currency once it comes into existence, a Bank of England official said.
(Bloomberg) — The UK will probably impose a limit of £10,000 to £20,000 ($12,017 to $24,033) for holdings of a new digital currency once it comes into existence, a Bank of England official said.
The central bank and Treasury stepped up work on how to issue the pound in a digital form as early as the end of this decade. But the government will impose a cap on how much of the currency people can hold to prevent money draining out of traditional bank accounts.
The measures are subject to a consultation until June about how the UK could adopt a central bank digital currency, or CBDC, which has been dubbed “Britcoin.” BOE Deputy Governor Jon Cunliffe said a digital version of the pound will probably be needed in the coming years to smooth transactions with online and mobile platforms.
“A limit of £10,000 would mean that three quarters of people could receive their pay in digital pounds, while a £20,000 limit would allow almost everyone to receive their pay in digital pounds,” Cunliffe said in a speech in London on Tuesday.
Though the idea is based on cryptocurrencies such as Bitcoin, a CBDC would be backed by the government in a way similar to physical cash. The BOE wants to make an instrument that works like cash and holds its value — but won’t accrue interest or become a tool of speculators.
The central bank wants to offer a cash-like instrument that will work more smoothly in online transactions as traditional banknotes and coins become less prevalent. Cunliffe noted that just 15% of everyday transactions use cash now, down from 60% just 15 years ago.
Currently, cash is the only form of public money backed by the government. Accounts held at commercial banks and money spent on credit cards is essentially a private transaction between an individual and a company — not backed by the full faith and credit of the government.
CBDC is aimed at stepping into the void left by the declining use of banknotes and coins. Cunliffe warned that confidence in money risks breaking down without some form of public money in circulaton, particularly in times of crisis.
“It’s perhaps no accident that use of cash went down in the pandemic but the holdings of cash went up,” Cunliffe said in response to questions after his speech at the trade group UK Finance. “There are periods when people want to know that their money is anchored or could be anchored in the safest form, which is cash. If we think cash disappears or it’s just there but it’s hardly usable… then I think you have a risk that confidence in money breaks down.”
The limit on how much of the digital pound people can hold is aimed at easing concerns that households will pull too much money out of the commercial banking system in order to buy the CBDC.
Cunliffe said the BOE had not yet reached a decision on whether a CBDC would be based on so-called distributed ledger technology, or DLT, such as the blockchain technology which underlies several cryptocurrencies.
DLT is a decentralized database, meaning information is stored and verified by a network of computers rather than one. But Cunliffe said Britcoin could also run on top of a “centralized, traditional database.”
The deputy governor also fleshed out the purpose behind the digital pound, in an effort to dismiss criticism from the likes of former Bank Governor Lord Mervyn King that the project is a “solution without a problem.”
“Our assessment is that on current trends it is likely that a retail, general purpose digital central bank currency – a digital pound – will be needed in the UK,” Cunliffe said. “While we cannot know with certainty how current trends in payments and technology will play out, it would be complacent to assume that developments in money and payments will end with the status quo.”
He pointed to the declining usage of cash and further developments in the digitalization of money, including the possibility that “big tech” firms may want to create their own digital coins.
“We cannot ignore the fact that the safest form of money, ‘public’ money – that it is to say money issued by the state for general use – will become increasingly less useful,” said Cunliffe.
A digital pound would perform the “anchor function” which cash currently carries, allowing the holder access to Bank of England money, he explained.
Cunliffe also said Britcoin could:
- Ensure that certain tech firms are not able to monopolize areas of the online market with their own coins, by acting as a “bridging asset” between different platforms.
- Allow for cheaper and faster payments, especially across borders
- Make money “programmable” so it could interact with so-called smart contracts, carrying out specific actions when certain conditions are fulfilled.
While the digital pound currently in discussion may not be suitable for wholesale markets, Cunliffe said, the bank is exploring options for “tokenization” of central bank money to be used in financial transactions.
–With assistance from Tom Rees.
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