The British government has shown interest in exploring a Central Bank Digital Currency (CBDC), popularly referred to as “Britcoin.” This move is seen as an effort to future-proof the Pound Sterling against cryptocurrencies and enhance the payment system.
Understanding the Concept of Britcoin
The Bank of England and the Treasury are deliberating on the creation of digital currency, prompted by a decrease in cash payments, partly due to the COVID-19 pandemic. This digital currency would coexist with cash and bank deposits, offering a fresh form of money for households and businesses in England. Importantly, this ‘britcoin’ would be pegged to the value of the Pound Sterling eliminating its use as an asset-driven profit mechanism. The implementation could potentially catalyze investment in the UK tech sector and reduce transaction costs for international businesses.
Unlike most digital currencies, Britcoin would be issued by state authorities if approved. This model is currently only utilized by the Bahamas, though China is running tests in various cities.
Defining Digital Currency
Digital currency provides a payment solution in electronic form that can be transferred between entities or users through technology like computers, smartphones, and the internet. It offers borderless ownership transfer and instant transactions, functioning much like physical currencies but with added benefits. Also known as digital money or cybercash, cryptocurrencies are a prime example of this.
Central Bank Digital Currency and Fiat Currency
A Central Bank Digital Currency (CBDC) represents the virtual form of a fiat currency in the form of an electronic record or digital token. Fiat Currency is government-issued currency unbacked by physical commodities like gold or silver but guaranteed by the issuing government. A CBDC is centralized, subject to regulation and issuance by the country’s monetary authority. Each unit performs as a secure digital equivalent to a paper bill and can be used for payments, value storage, and official accounting.
The Benefits of CBDC
CBDC aims to merge the advantages of cryptocurrencies’ convenience and security with the regulated, reserved-backed money circulation of traditional banking systems. New forms of digital money hold the potential of boosting remittances to the poor and developing economies. It could provide protection against financial instability set off by private payments systems failure while ensuring central banks retain control over monetary policy against the possibility of payments migrating to unregulated cryptocurrencies.
Associated Risks and the Importance of Compliance
Strict compliance with Know Your Customer (KYC) norms should be enforced to prevent the currency’s use for terror financing or money laundering. The existence of digital money could potentially compromise commercial banks’ health as it could deplete deposits, their primary source of income.
India’s Stance on Digital Currency
The Reserve Bank of India (RBI) views cryptocurrencies as an unstable unit of account due to its frequent and high fluctuation in value. According to RBI, cryptocurrencies carry several risks like anti-money laundering and terrorism financing concerns for the state and risks like liquidity, credit, and operational for users. Nonetheless, it is open to developing a sovereign digital currency at the opportune time.