The Bank of England is exploring a UK Central Bank Digital Currency (CBDC). It will be used by households and businesses for everyday payments and would exist alongside cash and bank deposits. It would be a digital representation of the pound and would be backed by the Bank of England, much like physical money is today. This will be different to cryptocurrencies, which are issued privately and are extremely volatile. A £10 digital will be the same value as a £10 banknote.

The growth of online banking and mobile apps has made digital payments easier and quicker. This growth was helped by the 2020 Covid-19 pandemic. According to the Statista website, in 2022, 86% of point of sale payments in the UK were made electronically, debit cards, credit cards and digital wallets. 10% of the payments were in cash. Contrast this with Europe as a whole and according to the European Central Bank (ECB) 59% of point of sale transactions used cash, mainly for small value payments. Card payments stand at 34%. In both cases, cashless payments were rising.

In the UK bank branches are being closed at a rapid rate, more so in rural areas as more people turn to online financial transactions.

Advantages of CBDCs

Payments can be made directly from payer to payee without the need of any intermediaries. This means payment in real time with instant payment verification.

It can be used for cross border payments. A migrant worker could send money home to his family quicker and cheaper than other methods. This would entail a claim on the issuing Central Bank, rather than going through an intermediary like a payment service provider such as Apple Pay or Worldpay. There would still need to be a currency exchange mechanism built in (are we working towards a world central currency, after all Europe has the Euro?)

Offline payments could be made, with many smartphones now having access to digital wallets. Financial crime should be easier to detect, as it happens, or if historical, tracking it would be easier.

Disadvantages

I guess one of the main disadvantages is its digital nature. National banks now are hacked and their security compromised. Customers are unable to access their cash or carry out any transactions. Imagine 68 million people unable to access their bank accounts. System failure would be catastrophic. The importance of data storage and protection cannot be overemphasized. The temptation to hackers would be irresistible.

If, however, CBDCs were received in a good light, commercial banks could suffer by intermediation, which means quite simply they would be bypassed in all financial transactions and money would simply be moved from buyer to seller. One way round this would be to not pay interest on balances or to put a cap on CBDC balances, maybe even a financial penalty on an excess. Online privacy is another major concern. Every financial transaction is recorded, all citizens could be subjected to unwanted, and possibly unlawful, surveillance. In extreme cases, their financial freedom could be curtailed.

Implementation

Theoretically, the Bank of England would hold the bank accounts of every citizen in the United Kingdom. This is not likely to happen, you don't put all your bank accounts in one bank. The administrative burden would be too much, and the UK government's record on implementing IT is not great.

An indirect approach is most likely, where all customer services are operated through Digital Cash Accounts (DCAs). These would be provided for by private sector firms, but all “cash” would be held electronically by the Bank of England.

As of October 2020, 16 countries were researching or looking at pilot schemes to implement a CBDC system.

Conclusions

Electronic payments exist now, but use third parties as intermediaries. With the implementation of CBDCs, these may still exist but in a different role, serving the Central Bank instead of numerous other commercial banks.

Cash, however, will still be an important part of our financial setup. Some people will still want to see, and be reassured, by notes and coins in their hand. Notes and coins can be budgeted, credit and debit cards less so.