Britain’s digital pound has all the signs of being another national disgrace, says Ex-Bank of England economist

A former Bank of England economist says there is “no customer demand” for the digital pound, calling it a costly project with unclear benefits.

Neil Record, Ex-Bank of England economist, appears to be highly critical of the digital pound initiative, saying it is a “costly, useless project” with “no customer demand.” He argued in an article for The Telegraph, that the push for a digital currency is more about protecting the central bank’s financial model than addressing any real public need.

In April 2021, the Bank of England and HM Treasury announced an initiative to investigate the creation of a “digital pound”. It said, “A CBDC (Central Bank Digital Currency) would be a new form of money that would exist alongside cash and bank deposits, rather than replacing them”. Two years later, the Bank of England issued a consultation paper on the venture. Today the project continues.

In the past decade there has been a tremendous revolution in the way in which the UK public spends money. Use of notes and coins has collapsed in the face of contactless cards and mobile payment; in 2013 51pc of all payments were made using cash; in 2023, it was 12pc.

This change has been driven by technological and financial innovation, accelerated by the 2020-22 lockdown rules. There have been countless criticisms of the explosive rise in contactless payments – security worries; loss of anonymity; concern about older people managing, and so on, but I have never heard anyone complaining that there isn’t a Central Bank Digital Currency. So I suspect, therefore, that the initiative is producer, not customer, driven.

Why would the Bank feel the need to create a digital currency? There are lots of fine words in the 2023 consultation, but none of the reasons quoted seems to me to be compelling enough to set up a major financial project. My instinct is that HM Treasury (the co-sponsor of the digital pound project) feels threatened by the secular fall in cash use, as the interest foregone by holders of notes and coins (”seigniorage”) is a significant source of income for HM Treasury (more than £4bn last year). 

While it is the Bank of England that receives the seigniorage in the form of interest-bearing deposits and notes at commercial banks, this seigniorage, less direct costs, is remitted to HM Treasury. If cash use continues to fall, then it is likely in due course that cash holdings, and hence seigniorage, will also fall.  While this seems a cynical take, I am struggling to find another credible motive for this project.

Which moves us on to the next question: what is a digital pound? Again, it isn’t clear to me from the Bank’s communication. It appears to be designed to be something that the general public would use, as secure as holding a bank note (that is, a direct liability on the Bank of England), and it would pay no interest.

It would exist as a digital entry on a Bank of England-run platform, and so would be designed to be easy to use, probably like modern contactless or online payment systems. But the vast majority of consumers would say that they already have this facility from UK banks or the newer online payment platforms.

It is true that online payment platforms do not offer a Government guarantee, but for holdings under £85,000, UK banks do.

So a Central Bank offering that looks to the customer very like a current bank current account would struggle to be appealing. UK current accounts can, and often do today, offer interest on balances.

Some banks also offer auto-sweep operations, which move larger current account balances to high-interest investment accounts automatically. So unless a customer holds very large balances (more than £85,000) with one bank, and is particularly concerned with the risk of that bank going under, then it is very unlikely that the digital pound would appeal.

There are other reasons why customers might not choose to use the digital pound. Most people regard the Bank of England as part of the Government. They might be suspicious that the Bank would not be able to protect their privacy, and hence that Government would in theory be able to discover their intimate financial affairs. People value their privacy, and however much the Bank of England might protest, they would regard this as under threat.

The Bank says that its digital pound would not use blockchain technology (from its Technology Working Paper, 2023), so this new digital pound would not mimic the cryptocurrencies which have found so much favour with customers. Cryptocurrencies are anonymous payment methods that circumvent all direct regulatory controls and supervision.

Central banks and financial regulators find cryptocurrencies a very serious threat to their power to monitor and control the financial dealings of their citizens, hence their very success. Cryptocurrencies are appealing both to honest citizens of oppressive regimes, and also to criminal and tax-avoiding citizens of open democracies.

Today, we appear to be no nearer to a digital pound being launched, but the Bank of England has spent £24m so far on this project. This is a great deal of money for a project for which there is apparently no customer demand, and no output yet apparent.

The Bank of England has not had a good decade, with the enormous losses associated with its QE holdings, and the apparently unanticipated spike in inflation in 2022-23. Let’s hope it decides to abandon this ill-fated venture and returns to its core remit of inflation control and sensible financial regulation.