The news that we’ve reached a new round of consultation on Britcoin has surfaced a central bank digital currency (CBDC) trend that has been bubbling away in the financial services world for quite a while. But while over 80% of world central banks are examining proposals and developing prototypes, the question as to why any consumer would actually want to use it remains unclear. [For clarity, in this article when we use the term consumer we mean any individual or business who might transact on a CBDC system.]

What is a central bank digital currency (CBDC)? 

Firstly, let’s start by explaining what we mean by a CBDC, and what Britcoin is shaping up to look like. A CBDC is a centralised digital currency introduced by a central bank, denominated in the fiat currency of the country. This could be reserved either for tasks like cross-bank settlement or aimed at the public. Allowing them to hold digital central bank money rather than hold money at riskier commercial banks in a bank account.

With so many players looking at options here, there’s naturally a large variation of what a public retail CBDC could even look like. From our latest view of Britcoin, it seems it will be able to make payments in person via a smart card or online via a digital wallet, and be interchangeable with cash and bank deposits. The Bank of England would provide the core “ledger” infrastructure, while private companies would run the wallets themselves. No interest would be paid on account totals, which would be capped at around £10,000 to £20,000 per person. 

Why would we want to introduce Britcoin?

Firstly, the threat posed by cryptocurrency disinter-mediating central banks by offering alternative stores of value with lucrative speculative opportunities alongside anonymity and data protection. Secondly “fomo” as everyone else seems to be doing it. The former of these arguments is obviously more valid, but it has to be assumed the recent cryptocrash has to some extent exposed the fragility of crypto-currencies as a fiat currency replacement. With Bitcoin’s rally of 32% at the time of writing after crashing 64% earlier in the year, this might not be entirely disproved. Overall the threat to normal currencies still doesn’t look very credible.

Nonetheless the exception to this might be stablecoins, but these still appear to be notably unstable given their name. Tether, the largest of these, has been repeatedly fined for misleading investors over their reserve, and Meta’s Diem is reportedly finished as a project after pressure from the US regulators. 

On a less flippant note, let’s examine 7 key consumer benefits for Britcoin:

So essentially the benefits to consumers remain unproven and are likely to rely to a large extent on the final construction of Britcoin itself if it passes this consultation phase. And to follow on from our last benefits point above, the implementation of this system is likely to be incredibly costly. It would require the creation of an entirely new infrastructure based on new payment rails, backed by updated regulatory processes, given these aren’t currently capable of dealing with a new form of money. 

There’s also a key worry that a migration of the public’s money from commercial bank accounts to a CBDC could affect the amount of credit commercial banks are able to offer, and destabilise the financial system. Movement of cash around the financial system on a large scale could impact how money markets function and this could be exacerbated in a crisis, where money might run into CBDCs from other liquid assets, including conventional bank deposits. This is why Britcoin will likely have a per-person limit on the account value, but while this limit is below the FCA safety barrier for private bank accounts, it throws money safety benefits into more doubt and offers a difficult backdrop for its introduction. 

This article isn’t intended to be unduly negative. There are benefits to Britcoin, but the large task remains of designing a CBDC that can realise these before a feted launch at the end of the decade, given the introductory costs and system disruptions. The key is that the consumer benefits need to be convincing enough to lead to sufficient adoption so that the whole project is worth it. Should these benefits be proved above nebulous “it will help with innovation” arguments, then Britcoin looks like a valuable addition to our payments ecosystem. 

Manifesto recently hosted an event “Mind the gap: have financial services lost the human touch?” where we covered the fundamentals of customer trust and discussed what we believe to be the blueprint of success. To download the full report, click the link HERE.