Recent thinking published by HM Treasury and the European Central Bank show divergence between the UK and European Union (EU) visions for digital currency.
UK and EU part ways on CBDCs
At present, the UK seems to be further down the path to introducing a digital currency, albeit in a less comprehensive fashion than the EU – though the latter’s plans are more than somewhat vague.
On February 7, the UK Treasury published a consultation paper outlining how a digital pound would work. It’s noteworthy that this paper is at pains to stress access to cash will not be affected.
The paper also makes it clear that the government would manage a “ledger” – effectively, create and manage a blockchain that issues digital pounds.
The amount of digital money consumers could hold would be limited in the first instance to £10,000.
In the UK model, consumers and businesses would hold their digital money in the form of a wallet that would operate just as NFC wallets currently operate with POS devices in-store.
Another point not lost on the Treasury is the need for privacy: the paper spends some time noting that current privacy restrictions relating to bank accounts would also apply to digital pounds.
Separate to the content of this most recent paper, the UK has indicated that the first use of a digital pound would likely be in interbank transactions – a proposal we comment on below.
“The UK’s digital pound could be held on a smart card, not just on mobile devices.”
Intriguingly for payments professionals, the UK paper notes a role for smart cards: payment cards with more memory and improved functionality compared to current plastic cards.
These smarter cards would be capable of holding digital money in a wallet on the card.
Many research studies in recent years have shown that consumers prefer cards as a form factor in payments – so this is an interesting development.
The UK’s consultation is set to end in early June, with plans for a subsequent design phase which will outline the technical aspects of how a digital pound will function.
The EU: planning to plan
An update relating to plans for a digital Euro, published by the ECB on 23 February, leads with the optimistic title, “Roll-out approach for the digital Euro” – but then fails to provide much detail on how a digital Euro might roll out.
Like the UK, the ECB has announced a consultation phase (to end on 23 March this year) so that retailers, banks, PSPs and other interested parties can express their views.
“A staggered approach seems inevitable given technical and regulatory complexities.”
To their credit, the ECB has outlined a wider range of use cases for the digital Euro compared to those evinced for a digital pound.
Their current thinking appears to be that a digital Euro might first roll out to consumers using digital Euros for P2P payments and for e-commerce, followed by other use cases such as in-store payments and government payments (welfare, health, pensions and more).
The EU’s paper also stresses the need for a phased or staggered approach, something which seems inevitable given the technical and regulatory complexities involved.
No mention is made of protecting consumers’ rights relating to access to cash or privacy concerns.
PCM SAYS:
There now appears to be clear divergence of approach in terms of the implementation of a digital pound and digital Euro. The UK sees the first implementation in wholesale banking.
This is eminently sensible, given there is a defined universe of banks – domestically at least – which would enable the Treasury to iron out the inevitable glitches from an operational point of view before wider roll-out.
It’s also reassuring to note the focus on consumer privacy and a limit on digital pound holdings, at least initially.
While the ECB’s proposal has merits, not least the plans for a phased rollout, it is disconcertingly short on detail.
At a wider level, the ECB is – possibly without knowing it – demonstrating the challenge of co-ordinating movement between the 20 nations that currently use the Euro.
UK investor says CBDCs to boost crypto
Nigel Green, CEO of UK financial advisors the deVere Group, says recent plans announced by the UK and ECB put a shine on bitcoin and CBDC more broadly.
In a statement welcoming the UK’s plans, Green said: “As more countries introduce CBDCs, the case for cryptocurrencies such as Bitcoin grows stronger.
CBDCs might have many advantages, including convenience, efficiency and transparency, but they do not offer privacy.
Bitcoin and cryptocurrencies will become increasingly attractive, with all the plusses of digital, such as speed, efficiency and convenience – via an open, immutable blockchain.
They are global, borderless, tamper-proof and censorship-resistant.”
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