Plans for the introduction of a digital pound were put forward by HM Treasury and the Bank of England (BoE) back in February of this year as the UK – and the City of London – looked to retain its position as a global leader in banking and finance.

Reuben Wales, ICAEW’s Head of Financial Services, has since collected the views of ICAEW members to present the Institute’s assessment of the case for the introduction of a Central Bank Digital Currency (CBDC).

“Overall, we support the BoE and HM Treasury’s initiative to consider the introduction of a CBDC – a ‘digital pound’. The authorities’ aim is to provide public access to retail central bank money, thereby anchoring trust in the monetary system in a more digitalised world and underpinning monetary and financial stability,” explained Wales.

He added: “The UK has a sophisticated and complex economy and while this potentially gives rise to some complex issues, the proposals are a good first step in the process for the UK to safely introduce a digital currency.”

In ICAEW’s consultation response, the Institute highlighted three key recommendations for future analysis and consideration:

1) Examine CBDC’s impact on payments and banking ecosystem

Payments are integral to a broader banking ecosystem supporting commerce, investment, risk management and trust. Current transactional banking is navigating the challenges of providing access to multiple payment systems. If the economics of existing payment methods erode as a consequence of a CBDC we may see higher fees, reduced cash availability and market imbalances. Future proposals should consider the holistic economics of retail payment chains, analysing incentives and fees.

Understanding the consequences of a widespread CBDC involves assessing both direct and indirect effects. The CBDC’s introduction may encourage innovation, competition and efficiency, prompting banks and payment interface providers (PIPs) to adapt their business models. While it could drive efficiency, this could also end up being at the expense of the delivery or cost of providing other commercial banking and payment services. Despite potential benefits, careful analysis is needed to grasp unfolding scenarios, risks and opportunities tied to CBDC parameters and design.

2) Strive to eliminate payment obstacles and enhance interoperability

For CBDC adoption, seamless payment experiences similar to existing methods are crucial. Design choices involve trade-offs affecting utility, so thoughtful consideration of private sector involvement in resolving frictions is necessary. Deposit limits, access restrictions and central ledger usage have intricate trade-offs and technological solutions may still pose challenges for wallet holders. Prohibiting corporate access has an impact on flexibility, while limiting non-UK resident access affects cross-border transactions.

3) Examine regulations and protections for various retail transactions in proposals

The introduction of a CBDC offers a risk-free digital asset, mainly addressing the settlement and counterparty credit risk of the depositor. However, existing payment systems offer additional risk mitigation and protections, including merchant refunds, fraud recourse and branch network access.

A retail CBDC could serve different purposes such as person-to-person transfers, merchant transactions, utilities and more, and consumers might expect the same safeguards as traditional payment methods. In tandem with CBDC proposals, a regulatory framework should address gaps between existing regulation and commercial protections. Trust and confidence in CBDC adoption will require broad understanding as to where these regulatory protections have been bridged and where they have not.

A longer version of this article appeared in the ICAEW Financial Services Faculty bulletin, available to Financial Services Faculty members. To find out more about the faculty and to become a member, visit the faculty’s dedicated hub.