The launch of the digital pound will be contingent on the results from its design stage carried out by the prior formulation of a joint- task force between the Bank of England and the HM Treasury. It will also depend on how the UK’s payment landscape develops over the next few years.
In a recent report, the UK’s House of Commons advised the Bank of England and the HM Treasury to conduct more research on launching a retail CBDC in the UK, stating that there were still ongoing challenges that needed to first be addressed before an official launch of the digital pound. For example, there needs to be a better understanding of how aggressively the use of cash is declining, in addition to the privacy and security elements around digital currency.
Another consideration, the House of Commons found, is the cost of building the necessary infrastructure that needs to be in place. Although the Bank of England didn’t provide a rough estimate of how much it would cost to build a digital pound, they did state in a letter to the House of Commons that “estimating the financial costs of building and running a digital pound will be an important component of the design phrase.” The letter also noted that “a digital pound would be a major infrastructure and building it would require significant investment.”
Despite these concerns, the House of Commons is still supporting the Bank of England and the Treasury to continue their design, but is asking them to err on the side of caution and to ensure that any of the challenges that may come along the way are addressed ahead of time.
Risk Remains an Issue with CBDCs
As more banks look into developing their own CBDCs, they must be aware of the potential risks, such as a drop in bank deposits. A decline in bank deposits means that banks will not be able to lend money as it relies on these deposits to fuel lending activities. Less money to lend to consumers and businesses could lead to an obstruction to economic growth. Also, deposits are another income stream for banks as they charge interest on these loans. A reduction in deposits would mean that a bank’s profitability will be impacted.
Another issue with CBDCs is the perceived end of financial privacy and anonymity. When consumers use CBDCs for their transactions, all transaction data will be easily accessed by the central bank. They will know the amount of money spent, where it was spent. As all user information is centralized and easily accessible for government or criminal surveillance, some fear that it can be used to track user movements, monitor their spending habits, and even receive targeted advertising.
Finally, banks will need to contend with scalability issues, and be ready to handle a large volume of transactions that occur in real-time. Unfortunately, most banks are still operating with legacy systems and are not equipped to handle this type of peak volume. Therefore, banks need to modernize their core banking systems with technological solutions such as microservices architecture, cloud computing, and API-driven integration to handle the significant volumes in real-time.
The bottom line is that if banks proceed with developing and launching their own CBDCs, they must be fully aware of the aforementioned risks and have the necessary safeguards to minimize any negative impacts.
