The British government recently conducted a public consultation on the introduction of a digital version of the British pound, also known as “Britcoin.” The consultation, conducted by the Bank of England and the Treasury between February and June 2023, received around 50,000 responses. However, the response was surprising, as it unleashed a public backlash with widespread concerns about privacy and the potential consequences for cash.
One of the main concerns raised by the public was the fear that a digital pound could be used to surveil UK citizens. With a central bank digital currency (CBDC), the government could potentially gather vast amounts of data that would allow them and other third-party companies to develop extensive profiles on individuals and closely monitor their spending habits. This could lead to a significant loss of privacy, far surpassing what is currently possible with traditional cash transactions.
Another concern raised by the public was the potential destabilization of the UK financial system. Respondents feared that a digital pound would make it easier for depositors to move their funds out of commercial banks in times of crisis, leading to bank runs. This could have severe consequences for the stability of the financial system, as seen in the collapse of several regional banks in the United States following deposit flight.
Despite these concerns, there are arguments in favor of a digital pound. Advocates argue that in an increasingly digital society, the UK needs to keep pace with technological innovation in the payments sector. A digital pound could also help the UK compete with other regions on a global scale. Additionally, a CBDC could potentially advance financial inclusion by simplifying transactions, reducing costs, and providing access to digital economic participation for those who are excluded from traditional banking.
However, the introduction of a CBDC could also pose risks. Privacy concerns are not unfounded, and a CBDC would inherently have some level of traceability, increasing surveillance. To address this, privacy-enhancing technologies could be incorporated to protect user identities and transaction details while still enabling regulatory oversight. There is also the risk of deposit flight during times of economic instability, which could exacerbate financial crises. Balancing the risk of deposit flight with the need for public enthusiasm for the digital pound will be crucial in designing the optimal system.
Perhaps one of the most controversial issues surrounding CBDCs is the concern that they are an attempt to snuff out private money, including decentralized cryptocurrencies like Bitcoin. However, experts argue that CBDCs are not necessarily intended to eliminate private digital currencies but rather to keep central bank money relevant for retail and peer-to-peer transactions as the use of physical currency declines.
Overall, the public consultation on the digital pound has brought to light important concerns about privacy and stability. While there are potential benefits to a CBDC, careful consideration must be given to address these concerns and strike a balance between innovation and safeguarding the financial system and individual privacy. The full-scale launch of a digital pound is still many years away, as the UK’s CBDC is still in the research stage.