Britcoin: an optional love story
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Britcoin: an optional love story

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The UK must avoid losing ground to the EU and private actors in the digital currency revolution

The UK has lagged other pockets of the world when it comes to developing and implementing a potential digital currency. The European Central Bank, on the other hand, is surging ahead with its own digital agenda.

And as the private sector and financial institutions too set out on their own paths, the UK risks being left behind.

However, this may be set to change. Last Tuesday, the Bank of England and the Treasury set out its analysis of "the case" for a retail central bank digital currency (CBDC), or a "digital pound" — the already aptly named Britcoin.

Although conceding that such an instrument will be needed in the future, the pair concluded that it would be premature to implement — or even attempt to implement — such a measure into the UK’s financial landscape at this point.

Preparation, however, can begin in earnest. To start, this involves the development of a technical blueprint — a task it said will take between two and three years.

As GlobalCapital understands, some legacy bankers will breathe a sigh of relief at this. And the House of Lords certainly will. In an economic affairs committee report published last year, it suggested a CBDC was a "solution in search of a problem" and that it was yet to be presented with a solid case for its introduction.

For the bond market, the digital currency revolution promises efficiency, time and cost savings in the quest for the wholesale removal of human error. Furthermore, bonds using other forms of digital currencies, and experimental CDBCs, have already delivered on promises of instant settlement and improved KYC and AML features.

One must only look at the proliferation of technological experts being accumulated at major banks to see that the digitalisation of the bond market is inevitable.

Although drawing up this technical blueprint will take a handful of years, a digital pound is unlikely to be fully operational before the end of the decade, the Treasury said. As a result, the Bank of England risks slipping behind the private sector and other foreign government-led projects.

The eurozone, for instance, is already way ahead of the UK. The ECB has almost wrapped up its two year investigation on issuing a digital euro, with a possible 2027 launch date on the cards.

Meanwhile, the European Investment Bank — in conjunction with the Banque de France — first used a prototype euro CBDC on a bond back in April 2021. When the supranational came to issue a digital sterling deal earlier this year, it opted to use tokenised bank deposits from HSBC.

HSBC is among a number of banks looking to come out with their own digital coin prototypes to make upfor the shortfall in the UK. But because these firms want their own digital platforms and digital currencies it risks fragmenting the market.

Even then, the only central bank cash directly available to the public is physical cash, with anything else tied up in bank deposits. But this influence is waning — the number of people eschewing cash has climbed from 2.9m in 2016 to 23.1m in 2021, according to banking association UK Finance, with the coronavirus pandemic hastening physical cash’s demise.

In an increasingly cashless world, a CBDC that gives the public direct digital access to central bank cash would help to claw back some of this influence and ensure direct access to central bank cash remains a key pillar of the UK’s financial stability.

As chancellor, UK prime minister Rishi Sunak was keen to establish the UK as a digital tech hub where the “potential of crypto-technologies” could be unleashed. If the government — and the central bank — are to follow through with this, then the UK must lead the way.

The relatively smaller size of the sterling market, compared to the euro or dollar markets, makes it ripe to become a hotbed for digital innovation. A benchmark print, for instance, would only require £250m across asset classes, meaning active funders — like banks or SSAs — would have greater flexibility to experiment with their deals.

But, from a political persepctive at least, the UK is far from stable. At the recent turnover rate two to three years is a roughly equivalent to five chancellors or three prime ministers. While it can be hoped this level of volatility will remain in the past, it can not be said for certain.

Furthermore, by the time this technical blueprint is finished the UK’s legislative landscape could look dramatically difference, once again. A general election must be held before January 2025 and all signs suggest that the UK’s crypto-friendly PM is likely to soon find himself sitting on the opposition bench.

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