The Digital Pound and Cryptocurrencies: Finding Common Ground for a More Robust Financial System

The UK, like other countries, is looking into creating a central bank digital currency (CBDC), which would function as a digital version of cash for everyday transactions. The Bank of England (BoE) has recently presented a plan for a digital pound and aims to implement it by 2025, but it is seeking public input until June 7, 2023. While there are benefits to CBDCs, including increased financial inclusion, the BoE is also considering how a digital pound could work alongside other digital currencies, such as cryptocurrencies, in order to reduce systemic risk and provide additional banking options for UK consumers.

Introduction

• The BoE has proposed a plan for a digital pound to be introduced by 2025.
• The public has until June 7, 2023, to provide feedback on the plan.
• The BoE is considering how a digital pound could work alongside other digital currencies, such as cryptocurrencies.

Benefits of a Digital Pound

• A digital pound would function as a digital version of cash for everyday transactions.
• It could increase access to financial services for the 1.2 million unbanked residents in the UK.
• The online wallets that hold digital pounds could also be used for “fiscal transfers,” such as tax subsidies or support payments for households and businesses.

Coexistence of a Digital Pound and Stablecoins

• Stablecoins are digital assets that are issued by private companies and pegged to a stable asset, such as the US dollar or British pound.
• The BoE has suggested that stablecoins could complement a digital pound in a mixed payments economy.
• The backing assets of stablecoins would need to be “fully backed with high-quality and liquid assets” in order to complement a digital pound.
• This would make the stablecoin “economically similar to the digital pound” and reduce financial risk.

Regulations of Stablecoins

• Currently, stablecoins are managed by private banks or organizations that are not regulated and audited.
• A stablecoin backed by a digital pound in an account held with the central bank would be more transparent and trustworthy.
• The central bank could regularly audit stablecoin providers’ reserves and impose capital requirements.

Conclusion

A digital pound could provide increased access to financial services and reduce financial risk. By coexisting with stablecoins, it could offer additional banking options for UK consumers. Stablecoins backed by a digital pound in an account held with the central bank would be more transparent and trustworthy, and the central bank could impose regulations to reduce financial risk.

FAQs

1. What is a digital pound?

• A digital pound is a digital version of cash for everyday transactions proposed by the Bank of England.

2. What are the benefits of a digital pound?

• It could increase access to financial services and offer fiscal transfers.

3. What are stablecoins?

• Stablecoins are digital assets that are pegged to a stable asset, such as the US dollar or British pound.

4. How could stablecoins complement a digital pound?

• By being “fully backed with high-quality and liquid assets,” stablecoins could offer additional banking options for UK consumers.

5. How could stablecoins be regulated?

• The central bank could regularly audit stablecoin providers’ reserves and impose capital requirements.