Wondering if the UK has a central bank digital currency (CBDC) or if there are plans to introduce a digital pound in the future?
You’ve come to the right place.
Sifting through the countless research papers and news announcements about the potential for a UK CBDC is enough to make anyone’s head spin. In this article, I’ve outlined the history of CBDCs in the UK and what we know about the Bank of England’s plans for the future.
Let’s get started.
Does the UK Have a CBDC?
The short answer is, no, the UK doesn’t have a CBDC… or at least not yet.
CBDCs have been a public topic of discussion among government officials in the UK since at least 2015. But, with the exception of a collection of research and working papers and a handful of committees in front of Parliament, the Bank of England and HM Treasury have made no major statements about whether or not they plan to pursue a UK CBDC.
That said, CBDCs are just one part of a rapidly expanding and developing world of blockchain technology and digital money.
A few other countries have already launched their own CBDCs and many more have official digital currencies in the works. If a UK CBDC does happen though, it probably won’t be any time soon.
History of CBDCs in the UK
For many people, CBDCs are a relatively new concept. But while the term ‘central bank digital currency’ has just recently entered the common parlance, the technology behind this kind of money and the UK’s interest in it is older than you might think.
In this section, I run through the history of CBDCs in the UK from the earliest public mention I could find by the Bank of England to the more recent activity.
This overview is by no means exhaustive – and there are probably things that us plebs don’t know about yet. However, I’ve put this together in case anyone (like me) is interested in what’s previously been said about a UK CBDC (and what its implementation might look like).
2015–2016: First Mentions of a CBDC in the UK
There are conflicting reports as to when the Bank of England and the UK government first started taking CBDCs seriously.
One of the first public remarks by a government official in the UK on CBDCs came in September 2015 when Andy Haldane, then the Chief Economist at the Bank of England, made a speech about negative interest rates.
The topic of the speech wasn’t directly related to CBDCs, but Haldane did mention blockchain-based central bank currencies in his discussion. He specifically talked about the theoretical benefits that a trustless Bitcoin-style central bank digital currency could have for levying negative interest rates.
Interestingly, Haldane viewed CBDCs as a potentially helpful and powerful tool for the Bank of England in its quest to better control national interest rates. But he also cautioned about the possible security and privacy concerns that would come with this new kind of digital currency.
Many analysts believe this was one of the first public mentions of the term ‘central bank digital currency’ by a major monetary policy official in the UK. Broadbent’s speech was fairly far-ranging and it provided a general overview of both the benefits and complications of introducing a CBDC in the UK.
Later in 2016, the Bank of England released what’s believed to be its first-ever working paper on CBDCs titled ‘The macroeconomics of central bank issued digital currencies’.
The paper provided an early look at the potential positive and negative consequences of introducing a CBDC in the UK. John Barrdear and Michael Kumhof, the paper’s authors, found that CBDCs could raise GDP (gross domestic product) because they could help reduce interest rates and monetary transaction costs. But they also cautioned about the challenges of adopting this kind of digital currency.
2017–2020: Early Days of UK CBDC Research
The release of the Bank of England’s 2016 working paper on CDBCs was the start of the early days of CBDC research in the UK. Between 2017 and 2020, the Bank of England released a sizable number of research articles and working papers on the potential impacts of a CBDC.
One of the first papers the bank released was a 2017 paper called ‘Digital future for sterling: assessing the implications’.
This paper further outlined the potential benefits and drawbacks of a CBDC. It was one of the earliest publications from the bank that clearly outlined and defined what CBDCs are, how they would differ from other forms of money, and how they would potentially impact different sectors of the UK economy.
The next two major papers released by the Bank of England were published in 2018 and they focused on how CBDCs would function in real life. This makes these papers among the earliest official discussions of the practical side of implementing a CBDC in the UK.
The first paper, ‘Broadening narrow money: monetary policy with a central bank digital currency’, was all about how CBDCs would impact monetary policy and how people transact using the British Pound.
However, the second paper, ‘Central bank digital currencies – design principles and balance sheet implications’, is particularly interesting as it outlined core principles that CBDCs could follow in the UK. That said, the point of this paper was more to encourage comments and debate and less so to create actual monetary policy in the country.
The Bank of England went somewhat dormant on CBDCs in the UK for most of 2019, but it started 2020 with a bang.
In January 2020, the Bank of England, along with the central banks from Canada, Japan, Europe, Sweden, and Switzerland, all launched a so-called ‘Central Bank Group’ to research CBDCs. The goal of this group was to assess and discuss the potential design, function, and practicality of CBDCs around the world.
As a result of this research group and other independent studies in the UK, the Bank of England came out with a spate of new discussion papers on CBDCs.
The most notable of these discussion papers is a 2020 document called ‘Central Bank Digital Currency: opportunities, challenges and design’. This discussion paper continues to be one of the most important and cohesive looks that we have at the Bank of England’s view on CBDCs – and it was designed to elicit comments from the public on a potential digital currency.
A few months later, the Central Bank Group published its own CBDC report. This report outlined a set of key requirements that the involved central banks all agreed would be important for the security and functionality of any future CBDC. But, it didn’t provide an opinion on whether or not they’re a good idea.
2021: UK CBDCs Become a Hot Topic
The Bank of England’s large investment in CBDC research between 2017 and 2020, alongside the meteoric growth of cryptocurrencies and other digital assets at the time, helped propel CBDCs into the global limelight in 2021.
Not long after the release of its major 2020 CBDC discussion paper, the Bank of England and HM Treasury officially launched a joint CBDC Taskforce in the UK.
The creation of this taskforce was the first public and concerted effort that we’ve seen from the UK government to thoroughly investigate the feasibility of a British CBDC. Up until this point, the Bank of England’s work was mostly theoretical, so launching the taskforce was a clear sign that the government is taking the idea of developing a CBDC very seriously.
During the summer of 2021, the Bank of England released a new paper that summarised and highlighted specific responses to its major 2020 discussion paper.
This paper was particularly important because it highlighted some of the biggest challenges that a UK CBDC would face, particularly with respect to privacy and security. It also looked at how a CBDC might interact and either advance or hurt specific public policy objectives set out by the government.
The Bank of England was very active in CBDC research during 2021, so it’s a bit much to discuss it all here. However, the biggest advances in CBDC discussions in the UK during 2021 happened, not at the Bank of England, but in Parliament.
In September of 2021, the House of Lords Economic Affairs Committee launched its own inquiry into CBDCs.
The committee had an open call for comments on challenges facing CBDCs and it held a number of hearings regarding the potential development of a digital pound. This was one of the first times we’ve heard of Parliament directly addressing a potential CBDC.
A few months later, in November, the Bank of England and HM Treasury both announced a 2022 consultation period with the Economic Secretary about the development of a CBDC. There was also a formal statement from John Glen, the Economic Secretary, about CBDCs, which suggests that the government is starting to take the matter more seriously.
2022 and Beyond: UK CBDCs in Limbo
Based on the flurry of CBDC-related activity that took place in the UK during 2021, one might presume that the UK is well on its way toward developing a digital pound. However, a number of events during the early part of 2022 have drawn the status of a UK CBDC into limbo.
One of the most interesting CBDC developments of 2022 was the publication of a Lords Economic Affairs Committee report called ‘Central bank digital currencies: a solution in search of a problem?’
According to the House of Lords, there is “no convincing case for why the UK needs a central bank digital currency (CBDC)”. The House of Lords made this statement as a result of the data it collected from its open call from comments in late 2021.
Although the House of Lords cited several key reasons why the UK probably doesn’t need a CBDC, some of its main concerns include:
- Potential for CBDC-induced financial instability.
- Risk that CBDCs could be used for organised crime.
- Concerns of state surveillance with the widespread use of CBDCs.
- Fears that CBDCs could give the Bank of England too much power over domestic monetary policy.
- Problems that CBDCs could cause in the effectiveness of international sanctions on bad actors and enemies of the state.
- Overarching concerns about security risks in a centralised digital-first financial system
However, the Lords Economic Affairs Committee didn’t fully rule out the possibility of creating a CBDC in the UK – it simply said that there wasn’t any convincing case for a retail digital pound in the country at this time.
There’s actually a section towards the end of the report that mentions a potential benefit of introducing a wholesale CBDC in the UK. The idea here is that a wholesale CBDC, which would just be used by financial institutions, could make bank transfers or securities trading more secure and efficient. The committee specifically recommended that the CBDC taskforce explore this angle.
Final Thoughts: Will the UK Get a CBDC?
The history of CBDCs in the UK is both long and complicated. Although the UK isn’t as far along in developing its own digital currency as some other countries, there’s no evidence either way as to whether a CBDC version of the British Pound might be in our future.
Hopefully, the coming months and years bring some more guidance from the government and the Bank of England about the future of money in the UK. For now, the general gist is that a UK CBDC is possible, but that it’s not likely to happen anytime soon,
But what do you think? Should the UK adopt a CBDC? What are some of the advantages and disadvantages you see of the pound going digital?
Let me know in the comments below!