The Treasury and the Bank of England (BoE) have announced they are to explore the possibility of a UK central bank digital currency.

This would be a new form of digital money issued by the BoE and would exist alongside cash and bank deposits, rather than replacing them.

In 2022, the Treasury and the Bank will launch a consultation to set out their assessment of the case for a UK central bank digital currency, evaluating the possible benefits and implications for users and businesses, and considerations for further work.

A decision is yet to be made on whether to introduce a digital currency in the UK, which would be a major national infrastructure project. In April 2021, the Boe and the Treasury initiated a joint taskforce to coordinate the exploration of a potential digital currency, and the Bank also set up the Engagement and Technology forums, where relevant stakeholders from industry, civil society and academia provide strategic and technical input.

Economic Secretary to the Treasury, John Glen, said the consultation will begin an open discussion on the role a UK central bank digital currency might play in the UK.

“I’d encourage everyone to contribute to the discussion so we can explore the opportunities this could bring, as well as understanding any risks it may pose,” he commented.

The 2022 consultation will inform a decision on whether the authorities are content to move into a “development” phase, which would span several years. The earliest date for the launch of a UK central bank digital currency would be expected in the second half of the decade, the BoE revealed.

Commenting on the proposed consultation, AJ Bell head of investment analysis, Laith Khalaf, said both the Treasury and the BoE “need to think long and hard” before embarking on a digital currency, because “the risks look high and the benefits marginal”.

“(It) could cause widespread disruption in the banking sector if it is introduced, as well as increasing the chance of a run on commercial banks in times of financial stress,” Khalaf said.
 
“If consumers were to adopt it in large numbers, that would mean a big shift of money out of deposit accounts, which are a key source of funding for commercial banks to lend into the economy.

“In order to persuade customers to stick with them, banks might have to increase the interest rates on offer on deposits, which would then be passed onto borrowers like mortgage holders, in order to preserve bank margins. Or they may have to end free banking, and start charging for basic services in order to make up for lost profitability. Or indeed the lower availability of funding could mean less appetite by banks to issue loans, which would restrain economic growth.”

Khalaf concluded: “At present, these potential benefits seem to pale in comparison to the risks. Particularly when you also consider that any sweeping financial innovation is likely to be a rallying cry for scammers, who will flock to the scene of any confusion to misappropriate funds wherever possible.”

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