The Digital Pound: An In-Depth Analysis of the Bank of England’s Central Bank Digital Currency Initiative

CImages04742712-4fcd-4a2f-b5df-fe0522cf7f19

Abstract

The Bank of England’s extensive investigation into the feasibility and implications of a Central Bank Digital Currency (CBDC), widely referred to as the ‘Digital Pound,’ represents a pivotal moment in the evolution of the United Kingdom’s monetary and payment systems. This comprehensive report meticulously examines the multifaceted dimensions underpinning the Digital Pound initiative, beginning with its foundational strategic objectives. It delves deeply into the proposed public-private partnership model, a cornerstone of its architectural design, elucidating the distinct responsibilities and interdependencies between the public central bank and private sector payment service providers. Critical considerations surrounding privacy and data protection are rigorously analyzed, addressing both the proposed technological safeguards and the public’s inherent concerns regarding surveillance and data misuse. The report also provides a detailed synthesis of the outcomes derived from extensive public consultations, highlighting key feedback and the subsequent policy adjustments. Furthermore, a thorough comparative analysis positions the UK’s approach within the broader global landscape of CBDC initiatives, drawing insights from international precedents. Crucially, the potential macroeconomic ramifications are explored, particularly the implications for monetary policy transmission mechanisms and interest rate management. The report also assesses the Digital Pound’s prospective impact on financial inclusion, aiming to bridge existing gaps, and scrutinizes the transformative effects it could have on the traditional banking sector, including potential disintermediation risks and new opportunities. This detailed exposition underscores the Bank of England’s diligent and cautious approach to modernizing the UK’s financial infrastructure while safeguarding stability and public trust.

Many thanks to our sponsor Panxora who helped us prepare this research report.

1. Introduction

The dawn of the 21st century has heralded an era of unprecedented digital transformation, profoundly reshaping industries and societal interactions globally. The financial sector, as a vital artery of modern economies, has been particularly susceptible to these disruptive forces, witnessing a dramatic shift away from traditional physical forms of money towards digital alternatives. This global paradigm shift has compelled central banks across the world to reassess the fundamental nature of money and payment systems. In response, a significant number of monetary authorities are actively exploring or developing Central Bank Digital Currencies (CBDCs) as a means to modernize financial infrastructure, enhance resilience, foster innovation, promote financial inclusion, and crucially, assert monetary sovereignty in an increasingly digital and interconnected world. The United Kingdom’s proactive initiative to investigate the introduction of a Digital Pound stands as a prominent exemplar of this global imperative. This endeavour is not merely about digitizing existing money; rather, it aims to establish a state-backed digital currency that would serve as a robust complement to, rather than a replacement for, physical cash and commercial bank deposits. By doing so, it seeks to address emerging challenges in the digital economy, such as the proliferation of private digital assets and the decline in cash usage, while safeguarding the stability and integrity of the nation’s monetary system.

The context for the Digital Pound is shaped by several intersecting trends. Firstly, the accelerating decline in the use of physical cash for transactions, exacerbated by the COVID-19 pandemic, has highlighted the growing reliance on private digital payment solutions. While efficient, these solutions often lack the ‘risk-free’ characteristic of central bank money, which is available to the public only in physical form. Secondly, the rapid emergence of novel private digital currencies, including stablecoins and other cryptoassets, presents both opportunities and challenges. While these innovations can drive efficiency, they also raise concerns about financial stability, consumer protection, and the potential erosion of monetary control if not adequately regulated. Thirdly, geopolitical shifts and the increasing digitalization of cross-border trade underscore the importance of maintaining national monetary autonomy. The Bank of England, alongside HM Treasury, has thus embarked on a comprehensive research and consultation journey, culminating in detailed proposals for a potential Digital Pound, carefully weighing its prospective benefits against inherent risks and practical challenges. This report elaborates on these foundational considerations and subsequent developments.

Many thanks to our sponsor Panxora who helped us prepare this research report.

2. Rationale for the Digital Pound

The impetus behind the Bank of England’s exploration of a Digital Pound is multi-faceted, driven by a strategic imperative to future-proof the UK’s monetary ecosystem. The primary objectives span the need to supplement existing forms of money, enhance payment system resilience, foster a competitive and innovative payments landscape, and fortify national monetary sovereignty in an increasingly digitized global economy.

2.1 Supplementing Cash and Enhancing Payment Resilience

The fundamental rationale for a Digital Pound begins with the observable and accelerating decline in the transactional use of physical cash across the UK. While cash remains important for certain demographics and scenarios, its diminishing role in daily transactions underscores the necessity for alternative payment methods that can provide the public with continued access to central bank money in a digital form. Currently, central bank money is accessible to the public primarily as physical banknotes and coins, and indirectly through commercial bank deposits which represent claims on central bank money. A Digital Pound would directly offer a state-backed, risk-free digital equivalent, providing a fundamental layer of security and trust in the digital payment landscape, akin to the stability offered by physical cash. This is particularly crucial in an era where the vast majority of payments are conducted digitally, relying on commercial bank infrastructure.

Beyond merely supplementing cash, the Digital Pound is envisioned as a critical tool for enhancing the overall resilience of the payment system. The increasing reliance on a limited number of private payment platforms, while efficient, introduces systemic vulnerabilities. A significant outage or failure within one of these dominant private systems could have widespread economic repercussions, disrupting commerce and causing significant inconvenience to the public. By introducing a robust, state-backed digital currency, the Bank of England aims to diversify the payment infrastructure, providing a resilient alternative that mitigates the risks associated with an over-reliance on commercial entities. This diversification would act as a crucial contingency mechanism, ensuring that payment flows can continue even in the face of widespread technological disruptions, cyber-attacks, or other systemic shocks affecting private sector infrastructure. As the Bank of England (2024) noted in its consultation response, ‘a digital pound would support the resilience of the UK’s payments system by providing a new infrastructure and payments option for households and businesses.’ Furthermore, it would ensure that the public continues to have access to central bank money for everyday payments, even as cash use declines, thereby maintaining financial stability and public confidence in the monetary system.

2.2 Promoting Competition and Innovation

The existing payment landscape in the UK, while robust, is characterized by a significant degree of concentration among a few large payment service providers and commercial banks. This concentration can stifle competition, potentially leading to higher costs for consumers and businesses, and slower rates of innovation. The introduction of a state-backed digital currency, operating on a novel platform, is intended to act as a catalyst for greater competition within the payment services sector. By providing a common, open, and secure digital infrastructure for payments, the Digital Pound would lower barriers to entry for new financial technology (FinTech) firms and other innovators.

This initiative is expected to incentivize the private sector to develop a diverse array of innovative payment solutions and services that leverage the Digital Pound as their underlying settlement asset. For instance, the programmability of a CBDC could enable new functionalities such as conditional payments, automated remittances, or instant settlements, which are cumbersome or costly with existing payment rails. This would encourage ‘smart contracts’ and other advanced applications, fostering an ecosystem where private Payment Interface Providers (PIPs) can compete on the quality, cost, and functionality of the services they offer, rather than solely on access to foundational payment infrastructure. As Linklaters (2024) highlighted, the Digital Pound could ‘stimulate new private sector innovation and competition in payments,’ leading to more efficient and user-friendly payment solutions that cater to a wide array of consumer and business needs, from everyday retail transactions to more complex industrial payment flows. By creating a neutral, public utility layer for digital payments, the Digital Pound aims to unlock the full potential of digital innovation, ultimately benefiting the wider economy through increased efficiency and choice.

2.3 Ensuring Monetary Sovereignty in the Digital Age

The rapid proliferation of privately issued digital currencies, particularly stablecoins, and the emergence of foreign CBDCs, pose significant challenges to national monetary control and financial stability. Stablecoins, designed to maintain a stable value relative to a fiat currency (often the US dollar), are increasingly being used for payments and settlements. While they offer speed and efficiency, their widespread adoption, especially if denominated in a foreign currency, could undermine the effectiveness of a nation’s monetary policy, complicate financial stability oversight, and even challenge the legal tender status of domestic currency. The Financial Times (2024) has noted the ‘dilemma over the rise of dollar-backed stablecoins’ for central banks, highlighting the potential for currency substitution and loss of control over domestic monetary conditions.

The Digital Pound is envisioned as a strategic tool to proactively address these challenges and maintain the UK’s monetary sovereignty in the evolving digital landscape. By providing a domestic, state-backed digital alternative, it ensures that the Bank of England retains ultimate authority and control over the nation’s monetary system. This means that regardless of the prevalence of private digital assets or foreign CBDCs, the UK would have a fundamental digital form of its own currency, directly issued and controlled by its central bank. This control is vital for conducting effective monetary policy, managing financial crises, and preserving the stability of the financial system. It ensures that the Bank of England can continue to influence domestic interest rates, manage liquidity, and act as a lender of last resort, functions that could be compromised if a significant portion of economic activity shifted to unregulated private digital currencies or foreign-issued CBDCs. As Skadden, Arps, Slate, Meagher & Flom LLP (2024) commented, a CBDC represents a move towards ‘Centralising Cryptocurrencies’ and maintaining national control over money. The Digital Pound is thus a critical strategic asset in ensuring that the UK’s monetary independence is preserved amidst the growing prevalence and influence of digital financial instruments globally.

Many thanks to our sponsor Panxora who helped us prepare this research report.

3. The Platform Model: A Public-Private Partnership

The proposed operational architecture for the Digital Pound is based on a ‘platform model,’ which fundamentally delineates clear, distinct, and complementary roles for the public and private sectors. This two-tier system is designed to leverage the respective strengths of the Bank of England (public sector) in ensuring stability and security, and the private sector’s agility in innovation and customer service. This collaborative approach aims to create a robust, efficient, and user-friendly digital currency ecosystem.

3.1 Structure and Functionality

At the core of the platform model is a strict division of labour. The Bank of England would assume responsibility for the foundational layer: the issuance of the Digital Pound and the operation of the central ledger. This central ledger would record all holdings of the Digital Pound in a wholesale capacity, ensuring the integrity, security, and finality of all transactions at the core level. The Bank of England’s role would be akin to providing the ‘rails’ or the underlying infrastructure. It would manage the technical platform, ensure cryptographic security, maintain the overall resilience of the system, and serve as the ultimate settlement authority for Digital Pound transactions. Crucially, the Bank would not hold individual user accounts or personal transaction data, reflecting a commitment to privacy by design.

Private sector entities, termed Payment Interface Providers (PIPs), would operate at the ‘edge’ of the system, directly interacting with end-users. PIPs would be responsible for developing and offering Digital Pound wallets, providing customer-facing services, and facilitating user interactions with the digital currency. This includes functions such as onboarding customers, performing Know Your Customer (KYC) and Anti-Money Laundering (AML) checks, offering user interfaces for sending and receiving payments, and potentially developing innovative overlay services (e.g., budgeting tools, foreign exchange services, programmable payment functionalities). Users would hold their Digital Pound balances with PIPs, similar to how they hold deposits with commercial banks or balances with e-money institutions today. The PIPs would then hold corresponding wholesale balances on the Bank of England’s central ledger. This bifurcation aims to capitalize on the Bank of England’s expertise in providing a stable monetary anchor and a secure settlement layer, while harnessing the private sector’s innovation, customer-centric approach, and distribution networks. The Bank of England (2024) reiterated this model in its ‘Response to the Bank of England and HM Treasury Consultation Paper,’ stating that ‘the Bank of England would operate the core ledger and the private sector would provide interfaces to users.’ This collaborative framework is intended to ensure both the security and usability of the Digital Pound.

3.2 Regulatory Considerations

Implementing the platform model for the Digital Pound necessitates the development of comprehensive and robust regulatory frameworks. These frameworks are critical to govern the intricate interactions between the Bank of England, acting as the issuer and core ledger operator, and the numerous private Payment Interface Providers. The regulatory landscape must address a wide array of considerations to ensure the integrity, stability, and public trust in the Digital Pound ecosystem.

Key areas for regulation would include:

Data Protection and Privacy: Establishing clear rules for how PIPs collect, store, and process user data, ensuring compliance with existing regulations like GDPR while accommodating the unique aspects of a CBDC. This includes strict limitations on what data can be shared and with whom, and mechanisms for users to control their data.
Transaction Security and Operational Resilience: Mandating stringent security protocols for PIPs to protect against cyber threats, fraud, and system failures. This would involve requirements for robust IT infrastructure, business continuity plans, and regular security audits. The aim is to ensure that the Digital Pound platform and its interfaces are resilient to disruptions, maintaining high availability for users.
Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) Compliance: PIPs would be on the frontline of AML/CFT compliance, performing customer due diligence (CDD) and suspicious activity reporting. Regulations would need to specify the exact obligations of PIPs in this regard, ensuring that the Digital Pound does not become a conduit for illicit financial flows, while also respecting privacy commitments. This balancing act between financial integrity and individual privacy is a recurring theme in CBDC design.
Consumer Protection: Establishing safeguards to protect users from fraud, error, and mis-selling. This includes clear disclosure requirements, dispute resolution mechanisms, and provisions for compensation in case of losses due to PIP negligence or failure. Regulations would also need to address issues like dormancy, unclaimed funds, and the treatment of customer funds in the event of a PIP’s insolvency.
Interoperability and Standards: Defining technical and operational standards to ensure seamless interoperability between different PIPs and with existing payment systems. This would prevent fragmentation of the Digital Pound ecosystem and ensure a smooth user experience.
Licensing and Oversight: Establishing a robust licensing regime for PIPs, similar to those for e-money institutions or payment service providers. This would involve assessing their financial stability, operational capabilities, and compliance frameworks. Ongoing oversight would be necessary to ensure continuous adherence to regulatory requirements. The Bank of England and HM Treasury (2024) have emphasized that ‘new primary legislation will be needed to enable the creation of a digital pound,’ which would provide the legal basis for these comprehensive regulatory frameworks. Ensuring clarity, proportionality, and fairness in these regulations is paramount to foster innovation, maintain public trust, and ensure the operational efficiency and long-term viability of the Digital Pound.

Many thanks to our sponsor Panxora who helped us prepare this research report.

4. Privacy and Data Protection

Privacy and data protection stand as paramount considerations in the design and public acceptance of any Central Bank Digital Currency, particularly the Digital Pound. The Bank of England and HM Treasury have consistently highlighted their commitment to embedding privacy as a cornerstone feature, recognizing that public trust is contingent upon robust safeguards against surveillance and misuse of personal data.

4.1 Core Privacy Features

The commitment to privacy in the Digital Pound’s design is articulated through several key architectural and policy choices. Foremost among these is the explicit separation of roles within the two-tier platform model: the Bank of England, as the issuer and central ledger operator, would not have access to users’ personal data or detailed transaction information. Its role would be limited to recording the aggregated wholesale value of Digital Pounds held by PIPs and settling transactions between them. Individual transactions would be recorded pseudonymously on the central ledger, meaning they would not be directly linked to an individual’s identity by the Bank.

Instead, personal identifying information (PII) and detailed transaction histories would reside solely with the Payment Interface Providers (PIPs), which would be regulated entities accountable for adhering to stringent data protection laws, including the UK General Data Protection Regulation (GDPR) and other relevant privacy legislation. PIPs would be responsible for Know Your Customer (KYC) and Anti-Money Laundering (AML) checks, necessitating their access to user identities. However, the Bank of England and the government would be legally prohibited from accessing this data for surveillance purposes. This commitment is not merely a policy statement but is proposed to be enshrined in primary legislation, providing a robust legal guarantee of user privacy. As the Bank of England (2024) stated in its consultation response, ‘neither the Bank of England nor the Government would have access to users’ personal data or transaction information’ and that ‘privacy would be ‘built in’ to the design of the digital pound by limiting the data available to the Bank of England and the government’. This foundational principle aims to align the Digital Pound with prevailing data protection norms and reinforce public confidence that it is a tool for payments, not surveillance.

4.2 Addressing Public Concerns

Despite the proposed architectural safeguards, public consultations have consistently revealed significant apprehensions regarding potential government surveillance, data breaches, and the misuse of personal data. These concerns stem from a general distrust of large institutions, a lack of technical understanding of CBDC mechanisms, and broader societal anxieties about digital tracking and control. The notion of a ‘programmable’ digital currency, while offering innovative functionalities, can also fuel fears of conditional access to money or targeted economic sanctions on individuals, even if such functionalities are primarily envisioned for commercial or governmental efficiency (e.g., automated welfare payments).

In response to these deeply held public concerns, the Bank of England has emphasized a multi-pronged approach:

Privacy-Enhancing Technologies (PETs): Exploration and potential implementation of advanced PETs such as zero-knowledge proofs (ZKPs) or secure multi-party computation (SMPC). While ZKPs are primarily used for verifying transactions without revealing underlying data, SMPC could enable computations on encrypted data across multiple parties without any single party seeing the raw data. These technologies could further strengthen the privacy guarantees by allowing necessary AML/CFT checks and regulatory oversight without compromising individual transaction privacy.
Clear Legal Frameworks: Beyond the prohibition on government access, comprehensive legislation would define precisely what data PIPs can collect, how it can be used, and under what limited circumstances (e.g., a court order in severe criminal investigations) it might be accessed by law enforcement. This legal clarity is crucial to prevent unauthorized data access and provide a strong legal recourse for citizens.
Transparency and Communication: Ongoing efforts to educate the public about the Digital Pound’s design, particularly its privacy features, are paramount. Transparent communication can demystify the technology and address misconceptions, building trust through understanding.
Independent Oversight: The establishment of independent oversight mechanisms or bodies, potentially akin to data protection authorities, that can audit the privacy practices of PIPs and ensure the Bank of England’s adherence to its limited data access commitments. These measures aim to strike a delicate balance: satisfying the legitimate requirements of financial oversight (e.g., preventing illicit finance) and regulatory compliance, while robustly upholding the fundamental right to privacy for UK citizens. The Bank of England (2024) and HM Treasury (2024) have repeatedly stressed the importance of achieving this balance, acknowledging that public acceptance hinges significantly on effective privacy protections.

Many thanks to our sponsor Panxora who helped us prepare this research report.

5. Public Consultation Outcomes

Public engagement and feedback have been instrumental in shaping the conceptual development and proposed design principles of the Digital Pound. The joint consultation paper issued by the Bank of England and HM Treasury served as a critical mechanism for gathering insights from a broad spectrum of stakeholders, including individuals, businesses, academics, and industry experts. The consultation process aimed to foster a comprehensive understanding of public sentiment, concerns, and expectations regarding a potential CBDC in the UK.

5.1 Key Findings

The public consultation process, which concluded in June 2023, yielded substantial feedback, providing invaluable insights into public and industry perceptions. Several key themes emerged consistently across the responses:

Privacy Concerns: This was by far the most prominent concern. A significant majority of respondents, particularly individuals, expressed deep worries about data privacy and the potential for government surveillance or the misuse of personal transaction data. Phrases such as ‘spy coin’ or ‘surveillance money’ reflected a prevalent fear that a state-backed digital currency could lead to unprecedented levels of state control over individuals’ financial lives. Many respondents specifically questioned how the balance between privacy and the legitimate needs of law enforcement (e.g., for AML/CFT) would be struck, and sought explicit legal guarantees against unwarranted data access. The Bank of England (2024) acknowledged that ‘concerns around privacy were the most frequent’ feedback received.
Financial Inclusion and Accessibility: There was a strong emphasis from various groups, including charities and consumer advocacy bodies, on ensuring that the Digital Pound does not exacerbate the ‘digital divide’ or marginalize individuals who lack access to digital infrastructure, digital literacy, or bank accounts. Concerns were raised about older demographics, rural populations, and vulnerable groups who might struggle to adapt to a purely digital monetary system. Respondents stressed the importance of universal accessibility, ease of use, and support for those who rely on cash.
Impact on Cash Usage: A notable concern articulated by the public was the potential decline or even abolition of physical cash following the introduction of a Digital Pound. Many respondents value cash for its anonymity, tangibility, and role in budgeting, particularly for vulnerable individuals. There were strong calls for a firm commitment to preserve the availability of physical cash as a choice, recognizing its continued importance for specific segments of the population and as a resilient payment method in emergencies.
Purpose and Need: While many understood the rationale, some respondents questioned the necessity of a Digital Pound, preferring to rely on existing private payment systems or expressing skepticism about the benefits relative to perceived risks. The ‘Solution looking for a problem’ sentiment was present in some quarters. Others sought clearer articulation of the specific problems the Digital Pound would solve that existing private innovation could not.
Security and Stability: While broadly supportive of the Bank of England’s role in providing security, some respondents raised questions about the resilience of the digital infrastructure, cybersecurity risks, and the potential for bank runs if funds shifted significantly from commercial banks to the Digital Pound.

5.2 Policy Responses

In January 2024, HM Treasury and the Bank of England published their joint ‘Consultation Response,’ directly addressing the feedback received. This response outlined several key policy measures and commitments designed to mitigate the concerns raised and refine the Digital Pound’s design:

Legislative Safeguards for Privacy: In a direct response to privacy concerns, a firm commitment was made to introduce primary legislation specifically to protect user privacy and data. This legislation would explicitly define the roles and responsibilities of the Bank of England and PIPs regarding data handling, and crucially, legally prohibit the Bank of England or the government from accessing users’ personal data or transaction information for surveillance purposes. This legal guarantee is intended to build public trust and differentiate the Digital Pound from potential ‘surveillance money.’ As Parliament was informed (HM Treasury and Bank of England, 2024), this commitment aims to ‘ensure high standards of privacy for users’.
Financial Inclusion Initiatives: The government and the Bank of England pledged to implement strategies ensuring the Digital Pound remains accessible to all segments of the population. This includes exploring design features like offline payment capabilities (as per the Digital Pound Experiment Report: Offline Payments, 2025, suggesting ongoing work in this area) to cater to situations without internet access. Furthermore, there is a commitment to ensuring assisted digital access for individuals who are not digitally literate or do not have access to smartphones/internet, potentially through partnerships with community organizations or post offices.
Preservation of Cash: In a clear assurance to those concerned about the future of physical money, both the Bank of England and HM Treasury reiterated their commitment to maintaining the availability of physical cash. They emphasized that the Digital Pound is intended to complement, not replace, cash, and that the government would legislate to ensure continued access to cash services across the country. This commitment seeks to ensure choice and cater to diverse payment preferences.
‘No Decision Yet’ Stance: While progressing with significant design work, the consultation response maintained that no final decision has been made on whether to proceed with a Digital Pound. This cautious approach allows for continued assessment of emerging technologies, international developments, and evolving public needs, ensuring a well-considered and robust decision-making process. The Bank of England has also released a ‘Response to the digital pound Technology Working Paper’ (2024), further detailing the technical aspects being considered in light of public feedback.

These policy responses reflect a responsive approach by the authorities, demonstrating a willingness to adapt the Digital Pound’s design based on public sentiment and expert advice, thereby fostering a more inclusive and trustworthy digital monetary system.

Many thanks to our sponsor Panxora who helped us prepare this research report.

6. Comparative Analysis with Global CBDC Initiatives

The UK’s exploration of a Digital Pound is not an isolated endeavour but forms part of a burgeoning global trend among central banks contemplating or actively developing their own digital currencies. This international landscape provides a rich tapestry of approaches, motivations, and technological choices, offering valuable lessons and comparative insights for the UK.

6.1 International Developments

Globally, numerous central banks are at various stages of their CBDC journeys, ranging from conceptual research to pilot programs and full-scale launches. Each initiative is shaped by unique national contexts, economic priorities, and technological capabilities:

China (Digital Yuan / e-CNY): China is a global frontrunner, having extensively piloted its digital yuan across major cities and integrated it into daily life. The e-CNY is an account-based, two-tier system, similar in structure to the UK’s proposed model, where the People’s Bank of China (PBOC) issues the digital currency, and commercial banks distribute it to the public. China’s motivation appears to be multifaceted: enhancing payment efficiency, promoting financial inclusion, countering the dominance of private payment platforms (Alipay, WeChat Pay), and potentially facilitating cross-border payments. The e-CNY has been deployed for retail use, including offline payments, demonstrating advanced technical capabilities. Critics, however, often raise concerns about data privacy and state surveillance given China’s political system.
European Central Bank (Digital Euro): The Eurosystem is in the preparation phase for a potential digital euro. Their objectives largely align with the UK’s: supplementing cash, fostering innovation, and enhancing strategic autonomy in payments. The digital euro is envisioned as a non-interest-bearing, privacy-focused retail CBDC. The ECB is actively engaged in a comprehensive investigation phase, exploring various design options, technical feasibility, and legal frameworks, with a strong emphasis on user privacy and financial stability. Similar to the Digital Pound, it aims to be a complement to, not a replacement for, cash.
United States (Digital Dollar Exploration): The US Federal Reserve has been more cautious, primarily conducting research and analysis rather than committing to a digital dollar. The emphasis has been on understanding the potential benefits and risks, particularly concerning financial stability, privacy, and the existing robust private payment system. The debate in the US is highly politicized, with some voices, such as Kevin Peacock (Reuters, 2025), suggesting that a future administration could ‘spur central banks to adopt digital coins,’ highlighting the political dimensions of CBDC adoption.
Nigeria (eNaira): Nigeria launched the eNaira in October 2021, becoming one of the first countries to implement a full retail CBDC. Motivations included financial inclusion, improving remittances, reducing the cost of cash management, and enhancing the effectiveness of monetary policy. While facing initial adoption challenges, the eNaira demonstrates a practical application of CBDC in an emerging economy context.
Jamaica (JAM-DEX): Jamaica launched its CBDC, JAM-DEX, in 2022. Its primary objectives include promoting financial inclusion among the unbanked population and enhancing the efficiency of the national payment system. JAM-DEX offers a practical example of a small island developing state leveraging CBDC technology.
India (e-rupee): The Reserve Bank of India has launched wholesale and retail pilot programs for its digital rupee (e-rupee), aiming to reduce operational costs associated with physical cash and improve payment efficiency. India’s large and diverse population presents unique challenges and opportunities for digital currency adoption.

These international developments showcase a spectrum of design choices. Some CBDCs are account-based (like China’s), others are exploring token-based approaches. There’s a debate on whether CBDCs should be interest-bearing (which could make them competitive with bank deposits) or non-interest-bearing. Privacy features, offline capabilities, and programmability also vary significantly across these initiatives. The Financial Times (2025) has noted that ‘the benefits of CBDCs are too great to ignore,’ but also acknowledges that ‘Even central banks are losing faith in CBDCs’ (2025), reflecting the ongoing complexity and differing perspectives globally.

6.2 UK’s Position

The UK’s approach to the Digital Pound stands in contrast to some of the more assertive and rapid implementations seen in other nations, such as China. The Bank of England and HM Treasury have adopted a deliberately cautious, consultative, and evidence-based strategy. This method prioritizes thorough assessment, risk mitigation, and extensive stakeholder engagement over speed of deployment.

Key characteristics of the UK’s position include:

Consultative Approach: The extensive public and technical consultations underscore a commitment to gather wide-ranging feedback, address concerns proactively, and ensure the eventual design aligns with the UK’s unique economic, social, and legal context. This contrasts with more top-down approaches seen elsewhere.
No Decision Yet: Unlike countries that have launched or committed to launching a CBDC, the UK maintains a ‘no decision yet’ stance on whether a Digital Pound will ultimately be introduced. This allows for flexibility to adapt to evolving technological landscapes, international standards, and changing domestic needs without being locked into a premature commitment. It also allows the UK to learn from the successes and challenges faced by other jurisdictions.
Emphasis on Complementarity: The Digital Pound is consistently framed as a complement to, rather than a replacement for, cash and commercial bank deposits. This nuanced positioning aims to alleviate fears of cash abolition and ensures continuity with existing payment habits, which differs from some narratives that implicitly suggest a move away from physical money.
Focus on Privacy and Trust: The UK’s strong emphasis on legal privacy guarantees and the two-tier model (limiting BoE data access) is a distinctive feature. This reflects an understanding that public acceptance in a democratic society is heavily dependent on robust privacy protections, differentiating it from jurisdictions where state control might be a higher priority.
Financial Stability as a Priority: The design considerations for the Digital Pound heavily emphasize mitigating risks to financial stability, particularly concerns about bank disintermediation. This prudent approach seeks to avoid unintended consequences for the banking sector, which is a core pillar of the UK’s financial system.

The UK’s cautious but thorough approach positions it as a thoughtful leader in the CBDC space, learning from international experiences while tailoring a solution specifically to its own national interests. The Financial Times (2025) argued that ‘Britcoin needs a bolder vision,’ suggesting some desire for a more proactive stance, but the current strategy reflects a preference for prudence and meticulous preparation.

Many thanks to our sponsor Panxora who helped us prepare this research report.

7. Implications for Monetary Policy

The introduction of a Central Bank Digital Currency, such as the Digital Pound, represents a significant structural change to the monetary landscape and could have profound implications for the conduct and effectiveness of monetary policy. While offering potential new tools and enhanced transmission, it also necessitates careful consideration of potential risks to financial stability and the banking sector.

7.1 Transmission Mechanism

The way monetary policy signals propagate through the economy, known as the transmission mechanism, could be significantly altered by a Digital Pound. Currently, central bank interest rate decisions primarily influence the economy through commercial banks. Changes in the Bank Rate affect banks’ funding costs, which in turn influence their lending rates and the broader economy. With a Digital Pound, a more direct channel for monetary policy implementation could emerge.

Direct Access to Central Bank Money: If individuals and businesses held Digital Pounds directly with the central bank (or with PIPs holding central bank money), changes in the interest rate applied to these Digital Pound holdings (should it be interest-bearing) could immediately affect economic behaviour. For instance, in a deep recession, a central bank could potentially apply a negative interest rate to Digital Pound holdings, directly incentivizing spending and discouraging hoarding, bypassing commercial banks to some extent. This could enhance the Bank of England’s ability to influence economic activity with greater precision and speed, particularly in extraordinary circumstances.
Enhanced Liquidity Management: A CBDC could provide the central bank with real-time, granular data on money flows (at an aggregated, anonymized level, respecting privacy), enabling more informed and precise liquidity management within the financial system. This improved visibility could lead to more efficient interventions during periods of market stress.
Targeted Policy Implementation: The programmability inherent in a CBDC could theoretically enable highly targeted monetary policy interventions. For example, specific amounts of Digital Pounds could be distributed to particular segments of the population or for specific purposes (e.g., green investment subsidies) as part of fiscal-monetary coordination, though such direct fiscal policy tools would require clear legal and democratic mandates.

However, these potential benefits come with caveats. A significant shift of funds from commercial bank deposits to Digital Pound holdings could impact banks’ balance sheets, affecting their ability to lend and manage liquidity. If banks rely more on wholesale funding or central bank facilities due to deposit migration, their funding costs could increase, potentially leading to higher lending rates for businesses and consumers. This disintermediation risk is a primary concern for the Bank of England, requiring careful design choices (e.g., holding limits, non-interest-bearing design) to mitigate these unintended consequences and preserve the effectiveness of traditional bank-led monetary policy transmission.

7.2 Interest Rate Policy

The design of the Digital Pound, particularly whether it would be interest-bearing or non-interest-bearing, would critically influence its implications for interest rate policy and financial stability. The Bank of England has indicated a strong preference for a non-interest-bearing Digital Pound, especially for retail holdings, at least initially.

Non-Interest-Bearing Digital Pound: If the Digital Pound did not bear interest, it would be analogous to physical cash in terms of return. This design choice is primarily intended to avoid direct competition with commercial bank deposits. By not offering an interest rate, the Digital Pound would remain an attractive medium for transactions and a safe store of value, but it would not incentivize large-scale shifts of funds out of commercial banks solely for yield purposes. This approach minimizes the risk of deposit flight during periods of financial stress, thereby safeguarding bank funding and financial stability. It also means that the Bank of England’s primary tool for monetary policy—the Bank Rate—would continue to influence the economy predominantly through its impact on the commercial banking sector and interbank rates.
Interest-Bearing Digital Pound (Hypothetical/Future Consideration): Should the Digital Pound eventually become interest-bearing, it could offer the central bank an additional, more direct tool for influencing economic activity. By directly setting an interest rate on Digital Pound holdings, the central bank could potentially exert a more immediate influence on consumer and business saving and spending decisions. In times of crisis, a central bank could lower the Digital Pound’s interest rate (potentially into negative territory) to stimulate the economy, or raise it to curb inflation. However, an interest-bearing CBDC would significantly heighten the risk of bank disintermediation, as it would compete directly with commercial bank deposits, potentially leading to large and rapid shifts of funds. This could impair banks’ lending capacity, increase their funding costs, and make them more vulnerable to runs during times of crisis. For these reasons, most central banks exploring retail CBDCs, including the Bank of England, are currently favouring a non-interest-bearing design to preserve financial stability and the existing two-tier monetary system.

The Bank of England’s careful consideration of these dynamics is essential for effective monetary policy formulation, ensuring that the Digital Pound, if introduced, enhances the central bank’s toolkit without undermining the stability of the broader financial system. The balance between innovation and preserving existing structures is a delicate one.

Many thanks to our sponsor Panxora who helped us prepare this research report.

8. Financial Inclusion and the Banking Sector

The potential introduction of a Digital Pound carries significant implications for both financial inclusion, aiming to bring more people into the formal financial system, and for the traditional banking sector, which might face both challenges and opportunities.

8.1 Enhancing Financial Inclusion

Financial inclusion refers to ensuring that individuals and businesses have access to useful and affordable financial products and services. The Digital Pound has the potential to significantly enhance financial inclusion in the UK through several mechanisms:

Accessibility to Risk-Free Digital Money: For individuals who may not have traditional bank accounts (the ‘unbanked’) or who rely heavily on cash, the Digital Pound could offer a secure, accessible, and state-backed form of digital money. While a PIP account would still be required, the Digital Pound itself would offer the same level of safety as physical cash, providing a foundation of trust that private digital payment solutions might lack for vulnerable groups.
Lower Transaction Costs: For low-value payments, particularly for small businesses or individuals who currently rely on high-cost payment services, a Digital Pound infrastructure could lead to lower transaction fees due to increased competition and efficiency in the payment ecosystem. This could make digital payments more affordable for everyone.
Programmable Payments for Welfare/Benefits: The programmability of a CBDC could enable more efficient and secure distribution of welfare benefits, pensions, or other government disbursements. This could reduce administrative overheads and ensure funds reach recipients swiftly, potentially simplifying access for those who find traditional banking cumbersome.
Resilience Against Financial Exclusion: In the event of a failure of a private payment provider or commercial bank, access to a Digital Pound could provide a fallback mechanism, ensuring that individuals retain access to some form of central bank money and can continue making essential payments. This enhances the resilience of financial inclusion itself.
Offline Functionality: Recognizing that digital access is not universal, particularly in remote areas or for certain demographics, the Bank of England is exploring offline payment capabilities for the Digital Pound (Bank of England, 2025, ‘Digital pound experiment report: Offline payments’). This would allow transactions to occur without an internet connection, crucial for ensuring accessibility during power outages or for individuals with limited connectivity.

However, ensuring true financial inclusion requires careful design. It is paramount that the Digital Pound does not inadvertently exclude individuals without digital access, digital literacy, or smartphones. This necessitates efforts to provide assisted digital access points, clear educational materials, and a continued commitment to the availability of physical cash, ensuring that the introduction of a Digital Pound expands choice rather than diminishing it.

8.2 Impact on the Banking Sector

The introduction of a Digital Pound could profoundly reshape the operational landscape for commercial banks, presenting both significant challenges and new strategic opportunities.

Challenges:

Disintermediation Risk: The most frequently cited concern is the potential for disintermediation, where individuals and businesses might shift a significant portion of their funds from commercial bank deposits to Digital Pound holdings. If the Digital Pound is perceived as safer (being central bank money) or more convenient, this shift could reduce the deposit base of commercial banks. Deposits are a primary, low-cost source of funding for banks, enabling them to extend credit. A substantial decline in deposits could force banks to seek more expensive wholesale funding, potentially increasing their cost of capital, reducing profitability, and impacting their ability to lend to the real economy. In a crisis, a ‘digital run’ from bank deposits into Digital Pounds could occur more rapidly than traditional bank runs, posing a systemic risk to financial stability. The Bank of England (2024) and HM Treasury (2024) have acknowledged this risk and are exploring mitigation strategies such as holding limits on individual Digital Pound balances (e.g., a proposed limit of £10,000-£20,000) and ensuring the Digital Pound is non-interest-bearing to reduce its attractiveness as a store of value over bank deposits.
Revenue Impact: Banks currently derive significant revenue from payment processing fees, foreign exchange services, and interest rate differentials on deposits. A more efficient, potentially lower-cost Digital Pound ecosystem could compress these margins, requiring banks to adapt their business models.
Investment in New Infrastructure: Banks may need to invest heavily in upgrading their IT infrastructure and systems to integrate with the Digital Pound platform and act as PIPs, representing substantial upfront costs.

Opportunities:

Role as Payment Interface Providers (PIPs): Traditional banks are well-positioned to become major PIPs. They possess extensive customer bases, robust KYC/AML capabilities, and established trust. This role could allow them to continue offering customer-facing payment services, leveraging their existing brand loyalty and infrastructure.
Innovation in Overlay Services: With the underlying payment rails provided by the Digital Pound, banks can innovate by building new, value-added services ‘on top’ of the CBDC. This could include sophisticated programmable payment solutions for businesses, advanced budgeting tools for consumers, cross-border payment solutions, or new lending models leveraging real-time payment data (with appropriate privacy safeguards).
Enhanced Efficiency and Reduced Risk: A well-designed Digital Pound could streamline interbank settlements, reduce counterparty risk, and potentially lower the operational costs associated with handling physical cash. For banks, accessing a risk-free settlement asset could enhance efficiency.
New Revenue Streams: While some traditional revenue streams might be challenged, new opportunities could emerge from offering premium Digital Pound services, integrating CBDC into existing financial products, or participating in the development of the broader digital economy spurred by the Digital Pound.

Ultimately, the impact on the banking sector will depend heavily on the final design choices of the Digital Pound, particularly its interest-bearing status and any holding limits. The Bank of England’s strategy aims to find a balance where the Digital Pound enhances the financial system without destabilizing the commercial banking sector, encouraging banks to evolve and innovate rather than solely facing disruption.

Many thanks to our sponsor Panxora who helped us prepare this research report.

9. Conclusion

The Bank of England’s diligent exploration of a ‘Digital Pound’ exemplifies a proactive and measured response to the evolving digital financial landscape. This initiative is underpinned by a compelling rationale, encompassing the critical need to supplement declining cash usage, bolster payment system resilience, foster innovation and competition within the financial services sector, and steadfastly preserve the UK’s monetary sovereignty in an era of proliferating private digital currencies and emerging foreign CBDCs.

The proposed platform model, predicated on a robust public-private partnership, strategically leverages the Bank of England’s foundational role in issuing central bank money and operating the core ledger, while empowering the private sector to drive innovation and provide customer-facing services through Payment Interface Providers. This two-tier architecture is designed to marry stability with agility.

Crucially, the Bank of England has placed an unequivocal emphasis on privacy and data protection, proposing legislative safeguards to explicitly prohibit governmental access to individual transaction data and committing to privacy-enhancing technologies. This commitment is a direct response to significant public concerns raised during the extensive consultation process, which also highlighted strong public desires for continued financial inclusion and the enduring availability of physical cash. The Bank and HM Treasury’s policy responses, including legislative commitments and design considerations for offline functionality, demonstrate a responsive approach to public sentiment.

A comparative analysis with international CBDC initiatives reveals the UK’s cautious and consultative methodology, learning from diverse global experiences while meticulously tailoring the Digital Pound’s potential design to its unique economic and social context. While a ‘no decision yet’ stance is maintained, the preparatory work is comprehensive, reflecting a strategic patience.

The potential implications for monetary policy, particularly concerning transmission mechanisms and interest rate policy, are being carefully modelled to ensure that a Digital Pound enhances the central bank’s toolkit without undermining financial stability. Similarly, the balance between enhancing financial inclusion for all segments of society and managing the transformative impact on the traditional banking sector, specifically the risks of disintermediation, remains a central design challenge. Mitigation strategies, such as holding limits and a non-interest-bearing design, are under active consideration to ensure the banking sector remains a vital pillar of the UK economy.

In essence, the Digital Pound represents a pivotal undertaking for the UK’s financial future. Its successful realization hinges on ongoing, transparent dialogue with all stakeholders, meticulous policy design that effectively balances competing priorities, and a commitment to adaptability as the digital financial ecosystem continues to evolve. The journey towards a potential Digital Pound is not merely a technological upgrade but a fundamental reimagining of money for the digital age, striving to secure the UK’s monetary future while fostering economic prosperity and public trust.

Many thanks to our sponsor Panxora who helped us prepare this research report.