The Bank of England (BoE) published a joint response with His Majesty’s Treasury to its earlier consultation paper about its proposed central bank digital currency (CBDC). The detailed response published on Thursday, January 25 reflects on the digital pound proposal, besides capturing concerns and questions on ‘Britcoin’ initiative.
Additionally, the consultation paper received over 50,000 responses, which is barely surprising considering the public attention surrounding CBDCs in general and the digital pound in particular.
The response of the BoE to its public consultation is the third public document from the bank about the proposed CBDC. The BoE published a discussion paper on CBDC in 2020, and a consultation paper on the digital pound in 2023, alongside this new response on Thursday. Additionally, the newly published paper addresses the privacy and data protection questions, the usage scope of the digital pound, holding limits, and its proposed design.
About the Response
The 72-page paper is a detailed response to the many questions about the proposed CBDC from the earlier published Consultation Paper. It clarifies many concerns about user rights and privacy protections, including feedback on the proposed design.
The paper addressed questions about privacy by promising to make the currency private but not anonymous. While it would still be possible to make anonymous payments with the proposed digital dollar, relevant anti-money laundering laws should still apply. An example is the legislation requiring financial institutions to report high-ticket transactions. Also, the paper addressed the issue of programmability and control over the digital pounds by clarifying that neither the Bank of England nor HM Treasury would (be able to) program digital pounds in user wallets.
Instead of creating accounts directly with the Bank of England, users will have wallets with private, third-party entities that serve like digital banks for their digital pounds. Users can then consent to programmability from their wallet provider to offer extra functionality with the innovative currency.
On the design end, the paper unveiled plans by the BoE and HM Treasury to make the digital pound secure, reliable, interoperable with existing UK finance systems, scalable, and inclusive. The Bank of England and HM Treasury clarified that the paper does not represent a finalized plan to introduce the digital pound, the designs of the proposed CBDC have reached advanced stages.
The Case Against the Digital Pound
The joint response to its public consultation about the digital pound marks significant progress in CBDC knowledge by regulators and governments, at least in the UK. One of the biggest concerns by observers against introducing a CBDC includes privacy and control risks, which are made possible by the permissioned blockchains that power CBDCs. Unlike the average cryptocurrency, users cannot mine CBDCs. A Central Bank issues them (hence the name), as the bank has complete control over the currencies in circulation.
This design flaw raises questions of control: The Central Bank having absolute control over the issuance and withdrawal of a currency at any time creates significant problems for its finality. There is also the problem of programmability. Since cash spending is not programmable, cash holders can buy anything from anyone, including sanctioned entities. CBDCs, however, would open the doors of programmability, making it possible to automatically deduct your tax from your balance or block payments to these entities, for example.
The digital pound consultation proposes solutions for most of the concerns, but there is no assurance that those proposals will make it to a final version of the currency. The Treasury Committee in the House of Commons had previously voiced concerns over the digital pound in a report titled: ‘The digital pound: still a solution in search of a problem?’
However, the new response to the public consultation about the digital pound and a letter by the Bank of England to the Treasury Committee assuages most of their core concerns about the project, hinting at possible parliamentary support for the digital currency project. While the House of Commons is yet to begin official deliberations on the digital pound as an idea, we should not expect too much resistance from the parliament if the UK government implements all the privacy proposals.
