What is a Digital Pound? And What is it Not?

The first and most important point is to distinguish a Digital Pound from cryptocurrencies like Bitcoin.

• Cryptocurrencies are privately created, decentralised, and notoriously volatile. Their value can swing wildly, and they are not backed by any central authority.
• A Digital Pound would be the opposite. It would be central bank money. Issued by the Bank of England, it would be a direct liability of the Bank itself. This means it would be fully backed by the state, and its value would be stable: one Digital Pound would always be worth exactly one pound sterling.

In essence, it would be a digital banknote, offering the same confidence and security as physical cash, but designed for a digital world.

Why is a Digital Pound Being Considered?

If our current system works, why change it? The Bank of England has several key motivations:

1. To Anchor Our Monetary System: As the use of physical cash declines, there’s a risk that money becomes entirely ‘private’ (i.e., commercial bank deposits and potential new forms of money from Big Tech). By providing a risk-free, state-backed digital currency, the Bank of England ensures that public money remains at the heart of our financial system as a trusted anchor.
2. To Promote Innovation and Competition: A Digital Pound could create a new platform for payment innovation. Private companies could build new services and wallets on top of the Bank’s core infrastructure, potentially leading to cheaper, more efficient payments and greater choice for consumers and businesses in Worcester and beyond.
3. To Improve Financial Inclusion: For the small number of people in the UK who do not have a bank account, a simple, state-backed digital wallet could provide access to essential digital payment services.
4. To Keep Pace with Global Developments: Many other countries, including China and the Eurozone, are also exploring CBDCs. The UK needs to keep pace to ensure it remains a global leader in finance and technology.

How Would it Actually Work for Me?

This is the most important question. How would a Digital Pound differ from the money you use today via your banking app?

Currently, the money in your bank account is a form of ‘private money’. It is a claim on your commercial bank (e.g., Lloyds or NatWest). It carries a tiny amount of ‘credit risk’ – the risk that the bank could fail. This is why we have the Financial Services Compensation Scheme (FSCS), which protects your deposits up to £85,000.

A Digital Pound would be ‘public money’, a direct claim on the Bank of England itself. This means it would have zero credit risk, making it the safest form of money possible.

You wouldn’t have an account directly with the Bank of England. Instead, you would access your Digital Pounds through a ‘digital wallet’ on your phone or smart device, provided by a private company, such as your existing bank or a new, regulated financial technology (Fintech) firm.

Addressing the Big Concerns

The prospect of a Digital Pound has understandably raised important questions and concerns among the public.

1. Privacy and Data: This is the number one concern. Would the government or the Bank of England be able to see what everyone is spending? The proposed model explicitly addresses this.

• The Bank of England would run the core payment system but would not have access to any personal data. It would be a blind operator.
• Your identity and transaction data would be held by your chosen private wallet provider, just as your bank holds your data today.
• The Government and the Bank have committed that, should a Digital Pound be launched, primary legislation would be introduced first to guarantee users’ privacy. Law enforcement agencies would only be able to access data under the same strict legal conditions they operate under today.

2. The Future of Cash: Many people worry that a Digital Pound is the first step towards a cashless society. The Bank of England and the Government have been firm and consistent in their response: The Digital Pound is intended to exist alongside and complement physical cash, not replace it. As long as there is public demand for banknotes and coins, the Bank of England will continue to issue them.
3. Programmable Money: Another fear is that the state could ‘program’ the money, for example, by preventing it from being spent on certain things or putting an expiry date on it. The Bank of England has stated clearly that this is not part of the plan. The Digital Pound would not be programmable by the Bank or the Government. Any ‘programmable’ features would be opt-in services provided by the private sector wallet provider—for example, a user might choose to automatically sweep any money left at the end of the month into a savings account.
4. Financial Stability: A valid concern among economists is that in a financial crisis, people might rush to move their money from commercial banks to the absolute safety of the Digital Pound, creating a bank run. To mitigate this, the Bank is proposing an initial holding limit of between £10,000 and £20,000 per person. This would be enough for everyday payments but would prevent huge, destabilising shifts of money out of the banking system.

What is the Timeline?

This is not happening overnight. The UK is currently in a ‘design phase’, which will run until at least 2025/2026. During this time, the Bank of England is working with technology firms, academics, and the public to develop a detailed blueprint.

Only after this phase is complete will a decision be made on whether to proceed to a ‘build phase’. If the project does go ahead, the earliest a Digital Pound could be launched would be in the latter half of this decade.

A Foundation for the Future

The world of money is changing. While the launch of a Digital Pound is still some years away, the debate around it gives us a fascinating insight into the future. It’s a future where our money needs to be as technologically advanced and secure as the rest of our digital lives. By planning for a system that is safe, private, and innovative, the Bank of England aims to build a foundation of trust for the UK economy that is as solid as Worcester Cathedral, ready to stand for centuries to come.