UK joins race for digital currency

UK consumers may soon find themselves dealing in a government-backed digital currency as well as traditional cash after the chancellor announced plans to explore the possibility of an electronic version guaranteed by a central bank.

Speaking at Fintech Week, Rishi Sunak outlined details of a new drive to “push the boundaries of digital finance” with a range of measures including exploring how a digital currency – money held and managed on digital computer systems rather than as physical notes and coins in a bank – might help protect and bolster the nation’s financial markets.

As the use of cash continues to plummet and following similar action by several other nations, members of HM Treasury and the Bank of England are now expected to engage consumers, business owners and users, as well as civil society groups, financial institutions and technical experts to decide if and how to proceed.

“With the decline of cash and rise of private digital currencies like Facebook’s Diem, the future of money risks being surrendered to unaccountable global finance and tech corporations,” says Simon Youel, head of policy and advocacy at not-for-profit campaign group Positive Money, which works to uphold a fair, democratic and sustainable economy.

“It is timely that the UK is launching a taskforce into a central bank digital currency, which would serve as a public form of money to complement physical cash.

“A central bank digital currency (CBDC) should be an opportunity not only to put forward a new public form of money, but also a wider public payments system, which would reduce our reliance on global tech giants and card companies to make payments,” he adds.

“It is welcome that the government seeks to engage civil society with this new taskforce, as there is a real risk of the design of a new monetary system being dictated by big industry players with considerable vested interests."

The UK move comes as central banks around the world eye China’s move to expand its own digital currency pilot scheme. As well as being used by Chinese citizens, the nation’s central bank expects overseas visitors attending the Beijing Winter Olympics scheduled for next year will use the currency during their trip, for example.

Last year the Central Bank of the Bahamas launched the Sand dollar – the digitised version of the Bahamian dollar – in a bid for more “inclusive access to regulated payments and other financial services”.  

Around the world, the pandemic has rapidly escalated a move away from traditional cash including in the UK, where half of adults interviewed at the end of last year said they were much less likely to use cash because of Covid.

The research from Marcus by Goldman Sachs found that one in three consumers were concerned about hygiene, but also pointed to other issues including having to use ATMs to withdraw money.

But the use of and attitude towards cash varies considerably across the generations, with 18-24 year olds more than twice as likely to believe you shouldn’t need to carry cash anymore than the over 55s.

And although two thirds of British adults agree technology is making it easier to manage our finances, more than half of us say carrying cash helps them appreciate the real value of money.

The average amount of physical cash found in the wallets, purses and pockets of the average UK adult was £36.30 in 2020, the survey found, though many people have far less and a quarter carry less than £5.

But being left behind, the rise of private digital currencies, and the demise of cash aren’t the only factors to consider.

“Cash is really expensive to manage, handle and control – the estimated cost of clearing and settling securities for central banks in G7 countries is over $50bn per year,” notes Vytautas Zabulis, CEO of digital assets trader H-Finance, who points out that the widespread use of central bank digital currencies managed by a central bank throws up other issues too.

“We have to understand that the role of commercial banks is, primarily, lending, and we cannot anticipate central banks to become lenders,” he adds. “In theory, yes, people would be able to open an account at a central bank and hold their money there; in this case, commercial banks would probably be able to access the accounts on some sort of private-public partnership.

“But the core logic of central banks is not to become lenders and to eliminate banks – it’s to create a new type of financial infrastructure, which would be way more efficient, almost costless and increase financial inclusion.”