The Bank of England (BoE) “Britcoin” Central Bank Digital Currency (CBDC) Benefits, Disadvantages, and Limit – 10,000 and 20,000 Digital Pound Cap
By Leroy A. Brown
Central bank digital currencies (CBDCs) have become a topic of discussion among policymakers and economists worldwide, with many countries exploring the possibility of creating their digital currencies.
England is one such country considering implementing central bank digital currencies (CBDCs) dubbed “Britcoin”.
Central bank digital currencies (CBDCs) are digital versions of a country’s fiat money, and they have the same value and functions as physical money.
Currently, about fifteen percent (~15%) of people use cash in England and, by extension, the United Kingdom (U.K.), which is lower than approximately sixty percent (~60%) about fifteen (15) years ago.
On Tuesday, February 7, 2023, the Bank of England (BoE) Deputy Governor Jon Cunliffe stated that by the second half of this decade, CBDCs will be in circulation, and they will be held in banks’ wallets.
He also stated that they are proposing a limit between 10,000 and 20,000 digital pounds per individual in an effort to manage risk and enhance the wide-scale adoption of the digital pound.
The risk that is being mitigated is people withdrawing vast amounts of money to purchase CBDCs, which may cause runs on commercial banks and potentially create a financial collapse.
Another reason given for the 10,000 and 20,000 digital pounds cap is that the 10,000 digital pounds would allow about three-quarters (3/4) of the residents to receive their pay in digital currency while at the same time having their money that was already there in the same account.
The 20,000 pounds limit would be designed so anyone can use it for day-to-day financial transactions.
Additionally, the Bank of England (BoE) Deputy Governor Jon Cunliffe indicated that money above the 10,000 and 20,000 digital pound limit would be in individuals’ commercial bank accounts, as the digital pound is not for a store of wealth.
Some of the reasons highlighted for the implementation of British CBDCs, referred to as Britcoins, are:
1
British CBDCs will be used as a “bridge” between platforms so tech companies do not dominate the online market with their crypto coins and tokens.
2
British CBDCs or Britcoins will be made programmable to execute specific actions.
Some of the benefits England may experience from CBDCs are:
1
CBDCs may help to reduce transaction costs and settlement times in England, and as such, they may make payments more efficient.
2
CBDCs may enhance the effectiveness of monetary policy in England by enabling the Bank of England (BoE), the central bank of the United Kingdom (U.K.), to have direct influence and more control over the money supply.
Having direct control would help the Bank of England to adjust the amount of money in circulation and be more segment specific in its approach.
This may enable the Bank of England to react quicker to economic shocks like the COVID-19 pandemic.
Some of the drawbacks England may experience from CBDCs are:
1
CBDCs may undermine the existing financial system in England as intermediaries like commercial banks and payment processors may not be needed.
2
The cost of borrowing may increase as commercial banks have fewer deposits, which may reduce their ability to create credit.
3
The implementation of CBDCs may erode privacy and increase government surveillance.
4
CBDCs may be vulnerable to cyber-attacks and may require significant investment in cybersecurity infrastructure.
5
Adopting CBDCs may reduce the demand for cash, which could have negative implications for the cash infrastructure, such as ATMs and bank branches.
6
With the Bank of England (BoE) proposing a 10,000 and 20,000 digital pound limit and programmable digital money, there are already concerns about the government of England and, by extension, the United Kingdom (U.K.) exercising greater control over individuals’ money.
The Bank of England (BoE) is aware of the challenges and is considering various approaches to address them, such as having CBDCs coexist with cash and bank deposits rather than replacing them entirely.
Another way to address these disadvantages is to have a "hybrid" CBDC system, where the Bank of England (BoE) may issue central bank digital currencies (CBDCs) directly to the public through regulated intermediaries such as commercial banks and payment service providers (PSPs).
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