The United Kingdom is taking steps towards the possible implementation of a state-backed digital currency, as the Treasury and the Bank of England have jointly released a consultation paper outlining the case for a Central Bank Digital Currency (CBDC).
The shift towards digital payments during the COVID-19 pandemic has prompted the government to consider the introduction of a CBDC, in order to respond to the potential emergence of privately-issued digital currencies that could impact the UK economy. The Bank of England has suggested that the CBDC, if introduced, would allow for public access to retail central bank money and encourage innovation, choice, and efficiency in domestic payments.
The digital pound would be equivalent in value to traditional cash, with each CBDC unit representing the same value as its physical equivalent. This distinguishes CBDCs from cryptocurrencies, as they are expected to be much less volatile.
To start, there will likely be a limit on the amount of the digital pound that each person can hold, as the Bank of England seeks to monitor its impact before adjusting the limit. The news of the consultation paper is seen as a positive development for the fintech industry, as the government continues to invest in this sector.
However, questions remain over the potential effects of the digital pound, including reduced cash flow for retail banks and concerns over government control and usage of consumer data. The Bank of England will also be monitoring the performance of other CBDCs, such as China’s digital yuan, before making a final decision.
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