Are Currencies Going Digital? 

The Digital Pound  

Are Currencies Going Digital? In the first half of 2023, the Bank of England and the UK finance ministry announced a consultation paper for the design of a central bank digital currency, also known as a CBDC. When this was published, the officials speculated that a digital pound could be implemented during the latter half of this decade. This would be useful to avoid the monetary breakdown that happens through an electronic cash system which presently overshadows the largest financial and technological institutions. 

UK Finance, an organisation which represents United Kingdom based banks and other financial firms, gave their thoughts on the subject. Stating that in an attempt to avert any risks and worries, individual holdings of the suggested digital pound should be limited to somewhere between £3,000 and £5,000. It will be necessary for authorities to ensure clear objectives are clearly outlined.  

The points from UK Finance came following the British governments and central banks introductory proposal to put in a temporary cap of somewhere between £10,000 and £20,000 to aid banks in avoiding deposit flights. Having taken note of possible risks that the digital pound could bring, UK Finance argued that the limit should be much lower. 

Furthermore, the finance group also argued that UK authorities have not yet outlined “clearly what objectives and needs the digital pound is expected to meet and why it is best suited to meet those needs. It is not clear from the consultation what place in the market digital central bank money is expected to take.”  

The final decision regarding the “Britcoin” should come in by 2025, in the meantime the UK Treasury and the central bank will be exploring potential use cases of a CBDC. 

The Digital Euro 

Is the path being paved for a digital euro? The potential introduction of a CBDC for the eurozone has received quite some attention.  

Very recently, the European Commission published a ‘Single Currency Package,’ an important next step towards a digital euro. This package consists of a set of legislative suggestions outlining the framework for the potential digital euro option. Meanwhile, also maintaining the accessibility for individuals and businesses to continue using cash. These proposals were presented alongside a more comprehensive package of legislation initiatives to revise the payment services regime and to introduce open finance.  

With these proposals come some careful considerations. Several factors that may not have been sufficient cause for the creation of a digital euro by themselves but when all put together make a compelling argument for the introduction of a digital euro to European policymakers. It begins with the pandemic bringing into the limelight how behaviours of European citizens have been changing when it comes to methods of payment, being more in favour of digitalised options. When you look at this along with the reliability of consumers on foreign payment services providers it shows why there should be some considerable thoughts on the project.  

In addition, the European Central Bank also observed the continuous and significant decrease of cash being used in the eurozone. This has been a beacon to signal that the emergence of stablecoins and third-country CBDC may be posing a threat to the monetary dominance of the euro. Because of this, the European Central Bank are actively following an agenda and plan which lead to the announcement of these proposals. Having also worked alongside the Eurogroup and the European Commission to resolve several critical questions and design features. These include concerns revolving around privacy, financial inclusion, effects on the banking sector and incentives for using the digital euro. 

Central Bank Digital Currency Trial in Switzerland 

Thoms Jordan, Chairman of the Swiss National Bank announced at the Point Zero Forum banking conference in Zurich the impending pilot of a Swiss Franc based Central Bank Digital Currency. Although a set date has not been confirmed yet, it was highlighted that the trial would begin sooner rather than later. This announcement aligns with the Bank for International Settlements’ forecast who in collaboration with the Swiss National Bank envisions and working central bank digital currency model by mid 2023. This was a factor of ‘Project Tourbillon’, a resourceful analysis of cryptocurrencies.  

For a limited period, the Swiss CBDC will be available on the SIX digital exchange. SIX, which is a subsidiary of the SIX Group oversees one of the biggest stock exchanges in Europe, in Switzerland. Although effectively this is only a test run to work out how feasible the central bank digital currency will be, the Chairman stated that the digital currency will be treated as real money that is completely backed by the Swiss National Bank. The main objective of this trial is to evaluate real transactions with market participants in the emerging field of central bank digital currencies. 

During the same Point Zero Forum banking conference, the Governor of the Swiss National Bank, Andrea Maechler, reiterated that the introduction of a central bank digital currency would not threaten the existence of cash. Stating that the feature of holding central bank money would remain intact, despite the new adopted technology. 

In Conclusion 

Central bank digital currencies are slowly but surely making their way into European countries. The United Kingdom have submitted a consultation paper and Spain have taken the next step towards a digital euro. Results from this upcoming Swiss trial could help to further progress central bank digital currencies coming into action.  

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