Will “Britcoin” bring legitimacy to cryptocurrency in the UK?

Will Britcoin Bring Legitimacy to Cryptocurrency in the UK?

In an environment where cryptocurrency is gaining popularity, some institutions have already expressed their interest in digital currencies such as Ethereum or Binance coin. The UK could launch a digital currency known as “Britcoin” within the next decade, according to plans from the Treasury and the Bank of England. Anika Sidhika writes

In response to the rise of privately issued cryptocurrencies and stablecoins, the government launched a four-month public consultation process. It builds on the first taskforce Rishi Sunak set up in 2021 when he asked the Bank of England to investigate the case of a central bank-backed currency.

According to the Bank of England’s website, the currency backed by the central bank “will be reliable and retain its value over time”, unlike cryptocurrencies, which can fluctuate significantly and put investors’ assets at risk.

This industry has been particularly unstable in recent months, fueling calls for increased regulation. Last year’s crypto crises caused a decline in assets, and the multibillion-dollar collapse and bankruptcy of crypto exchange FTX in November spurred accusations of fraud against founder Sam Bankman-Fried.

The government is considering the introduction of a digital pound for two compelling reasons. The first is that other countries are exploring the development of this technology and the private sector can also participate with stablecoins, which are comparable to crypto assets but tied to the value of existing currencies such as Bitcoin.

More than 100 countries are considering using digital currencies issued by central banks, according to the Atlantic Council. Following Indonesia’s work on a digital rupiah prototype and Ghana’s e-cedi pilot program, Sweden is working on an e-krona with Accenture. Eleven countries, including Jamaica and the Bahamas, have already implemented central bank digital currencies.

The Bank of England is right to worry that new forms of monetary value such as this could erode its grip on the financial system and undermine its ability to drive the economy.

The logic is that the digital pound will improve the payment system, allowing businesses and consumers to carry out faster, cheaper and smarter transactions. Micropayments for services could be possible with a cheaper, more automated payment system and new business models could be launched.

The proposed digital currency will be in pounds, with 10 pounds of digital currency equal to one 10-pound note. Currency stored in a digital wallet can be used to make electronic payments for goods and services.

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Proponents of central bank digital currencies believe they facilitate and reduce the cost of digital transactions and increase access to the financial system by allowing those without bank accounts to use them.

Advantages of cryptocurrency

Ian Taylor, head of crypto and digital assets at KPMG UK, told Private Banker International: “In an increasingly digital society, the UK needs to keep up with the pace of innovation happening in the payments sector. “The Bank of England’s consultation on a proposed CBDC is a sensible approach to keeping the UK at the forefront of technological change, without yet committing to the significant investment required to launch a digital pound.”

A new trend connecting cryptocurrencies to the mainstream financial sector is central bank interest in this phenomenon, for both positive and bad reasons. What could be the disadvantage?

Peter Harmston, Partner and head of UK payments at KPMG UK, adds: “The benefits and challenges of introducing a digital pound need to be carefully considered. There are a number of factors to consider, including the inevitable decline in physical cash, the importance of ensuring we are financially inclusive as an economy, and the fine balance between the lack of consumer protection in the digital asset market. ”

Peter Harmston, Partner and Head of Payments at KPMG UK

In the context of anti-money laundering and crime financing, central banks and other regulators have highlighted concerns about the anonymity of cryptocurrency use. Despite its problems, do banks believe cryptocurrency is trustworthy?

“Not all crypto assets are the same. Unsupported assets are highly volatile and their value can drop to zero. Even some stablecoins dropped to zero. However, some asset-backed, fiat-backed, and algorithmic or decentralized currencies have maintained stable values ​​during highly stressful periods. Finally, as many activities and assets will soon fall within the regulated framework, this will lend certain levels of credibility to what is ultimately just technology,” explains Taylor.

The digital pound is not without risk. The impact on the financial sector is significant. So how will this affect the whole of the UK?

“It’s hard to say when trials are still a few years away,” Taylor explains. ”The government’s goal is to ensure that we are innovative and continue to lead the world in payments.”

While it is expected to provide the necessary infrastructure for the digital pound, the Bank of England does not state that it will contact customers directly. People will instead store their “Britcoin” in wallets provided by financial intermediaries that also store their data; Neither the Bank nor the Government will have access to these wallets.

But have banks looked into digital currency technology and security issues to see if Britcoin is a good investment?

“This was always a purely speculative asset,” says Andrew Haslip, GlobalData Asia Pacific Content Manager. ”According to our 2022 Survey of Global Asset Managers, it will provide good returns (36.1% on capital gains) and 28.1% as a store of value. Neither is valid anymore, the future will really depend on crypto exchanges being more tightly regulated and more reliable as financial partners.”

Former Bank of England Governor Mervyn King, who is now a member of the House of Lords, said the digital pound “will have risks but not obvious benefits”.

Financial inclusion concerns

Although the Bank of England is not claiming that “Britcoin” will replace cash, there is no denying that this is another step towards the digitalization of banking, which has the potential to exclude the less tech-savvy.

Authorities are very interested for various reasons. As the digital revolution progresses and countries compete with each other for market share in the growing technology sector (including fintech), governments and central banks want to be seen as innovators.

Despite the controversy, do banks believe cryptocurrency is trustworthy?

“Not all crypto assets are the same,” Mr. Taylor argues. ”Unsupported assets are highly volatile and their value can drop to zero. Even some stablecoins dropped to zero. However, some asset-backed, fiat-backed, and algorithmic or decentralized currencies have maintained stable values ​​during highly stressful periods. Finally, as many activities and organizations will soon fall within the regulated framework, this will lend certain levels of credibility to what is ultimately just technology.”

Another reason for interest is that it is more practical. The use of cash has been falling sharply in recent years, and this process has accelerated further during the COVID 19 crisis due to the handling of banknotes and coins. However, it is important that the financial system offers a payment tool that is accessible to everyone.

The Bank of England will provide us with much more detail on how the digital pound develops, but whether the market is ready for this change remains an open question.

“Even though there is a lot of volatility in the market, HNW investors have only allocated a small portion of their wealth to crypto, so it won’t impact the big players much,” Haslip admits.

Many aspects of society have changed profoundly due to recent advances in communication, data processing, storage and encryption. Moreover, given that money and payments are all about data management and communication, it is not surprising that such advances are putting pressure on the banking system. Although our current system and the protocols it uses have evolved over time, its basic structure dates back to the Internet. Therefore, although digital currency is not new, it is critical to re-evaluate our institutional framework to determine if and how it should adapt in response to the changing environment and, of course, societal needs.

“Will Britcoin bring legitimacy to cryptocurrency in the UK?” was originally created and published by Private Banker International, a brand owned by GlobalData.

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