The colour of (digital) money

08.12.2021 | By SymphonyAI team

It’s commonplace to pay for transactions with your smart phone or tap-and-go debit/credit card these days, especially with reduced contact and distancing requirements under the pandemic. Many people still carry physical cash, though we are more reliant on paying via a ‘digital’ means, whether it be for groceries, transport or large purchases.

Is this hybrid system – part cash, part cashless – about to change for good? Last April, the Bank of England (BoE) and the Treasury announced they would be forming a joint taskforce to assess the benefits of a Central Bank Digital Currency (CBDC), how it could be used by households and businesses, and how it could exist alongside cash and bank deposits, rather than replacing them.

Although the task force is not expected to report until later in the year, recent press reports suggested that the UK Chancellor, Rishi Sunak, was poised to greenlight a British CBCD – “Britcoin”. This new digital currency would, the reports suggested, be controlled by the BoE in the same way as sterling, and would continue to reflect the fact approximately 80 per cent all money in circulation is created digitally by commercial banks, with the remainder being cash (bank notes and coins) and central bank reserves.

Although Sunak was quickly out of the blocks to deny that the UK was about to replace cash with Britcoin, as befits a former Hedge Fund manager, he also stressed his determination to support innovation and technology across financial services in the UK.

An injection of uncertainty

This is not the first time a seemingly well-sourced article has been published only to be followed by an official rebuttal. It’s a perennial occurrence. In this case, it raises more questions than it answers for consumers, banking institutions and businesses/retailers alike. This uncertainty is unfortunate, particularly as it coincides with the economy starting its slow – and hopefully irreversible – recovery from the worst of the pandemic.

That’s not to say that a CBDC does not offer some potential. While advances in distributed ledger technology have helped prompt central bankers to reconsider the building blocks of payment systems, there has also been declining cash use in some jurisdictions, as well as the rise of privately issued global stablecoins. And certainly, a CBDC could cut banking costs for small firms, as well as reduce the length of time it takes to make payments online and help address financial exclusion. These are all important factors to consider.

However, it is equally clear that abundant questions and challenges continue to adorn the landscape. How quickly would the economy and people adopt it if it were to pass and come into effect? How would Britcoin affect companies’ anti-money laundering programmes? How would the BoE and the Treasury safeguard consumer protection and financial stability? These are just a few of the questions which spring to mind – there are plenty more.

Interestingly, the UK is not the only country currently considering a virtual currency. At the moment, only The Bahamas uses one – its Sand Dollar – however, other countries are also looking at their adoption.

For example, China has started a trial in Beijing by handing out 40 million renminbi (£4.4 million) of its digital currency to citizens via a lottery. Residents of the Chinese capital can use two banking apps to apply to win one of 200,000 so-called “red packets” containing 200 yuan each, which can then be spent via selected merchants. And the United States has also been considering a CBDC, with its Federal Reserve partnering with the Massachusetts Institute of Technology to conduct active research and experimentation related to distributed ledger technology and the potential use cases for digital currencies.

Such examples add to the body of evidence that cryptocurrencies are not going away. It should come as no surprise, then, that our clients are asking for advice and for insights about our own approach to navigating the digital currency landscape.

Much will hinge on how regulation in the UK (and the world) will evolve in the months and years to come.

At a crossroads

As things currently stand, there are two paths that Britain could follow. The first one leads to a truly cashless society, one that relies on digital currency and digital payments.

Such an outcome could help reduce the length of time it takes to make payments online and help address financial exclusion. It could perhaps reduce the risk of money laundering, which has typically relied on cash to launder and reintroduce into the financial system again. Though no doubt, sophisticated criminals would be forced to find new ways around this to carry out their operations!

The second path is one where the UK advances and compliments other virtual currencies while staying innovative in financial and economic sectors. This option would reflect the chancellor’s wish, as he has put it, to use technology “to cement the UK’s position as the world’s preeminent financial centre” while also ensuring that British people can continue to access cash as and when they need it.

The UK therefore finds itself at something of a crossroads. Are we headed towards a cashless society or will our current hybrid system prove to be of firmer root? After all, it’s worth noting that as of June 2020, the value of outstanding notes and coins in circulation in the UK reached approximately £85.9 billion – an increase of almost £4.7 billion compared to January 2017.

Only time will tell what will happen but businesses large and small should start preparing for both eventualities. This is no time to be asleep at the wheel.

Mixed signals about Britain leaping into the virtual currency world have resulted in more questions than answers, says Charmian Simmons

Latest Insights

What is the 50 percent rule?
07.23.2024 Blog

What is the 50 percent rule? – FAQ and Everything you need to know

Financial Services Square Icon Svg
Entity Resolution
07.17.2024 Blog

Entity Resolution

Financial Services Square Icon Svg
regtech company of the year
07.05.2024 Blog

SymphonyAI wins RegTech Company of the Year at the FinTech Awards London 2024

Financial Services Square Icon Svg