Britcoin: legal and regulatory issues with the digital pound

The Bank of England (BoE) recently announced the possibility that it may issue a digital pound. The consultation paper, entitled ‘The digital pound: a new form of money for households and businesses,’ explains why the BoE considers it advantageous to explore the development and deployment of a UK digital currency.

However, the project and the characteristics of the digital assets have raised many questions and concerns. Some among those include whether the digital pound will be a cryptocurrency, what the future of cash looks like and the implications of the introduction of a digital pound limit.

Before diving into the legal considerations, let’s briefly discuss what the digital pound is, what it will be used for and why the BoE wants to issue a digital version of the pound sterling.

What is the digital pound?

If issued, the digital pound (also known as "digital sterling" or "Britcoin") would be the UK's version of a central bank digital currency (CBDC). The digital pound would be issued by the BoE in collaboration with private firms and have its value fixed to the pound sterling, unlike other cryptocurrencies (such as Bitcoin or Ether) which are issued by private entities and are subject to significant price volatility. Thus, the digital pound’s price would remain stable despite speculations and market conditions.

The digital pound is also not to be confused with the category of cryptoassets known as stablecoins, such as GBPT, which have a value pegged to an underlying asset or currency (in the case of GBPT, the pound sterling), but are issued privately. Rather, the digital pound would be backed by the UK government, making it a digital version of the pound sterling and considered legal tender.

Holders of the digital pounds would be able to use it for everyday payment transactions, in the same way you would use cash or your debit card. While it is not going to replace cash in the foreseeable future, its features should simplify and speed up payment transactions as well as provide an alternative payment option which would be highly scalable and capable of having features programmed into it over time.

Some features could include the imposition of a cap on where the currency can be spent and on what. An early limitation proposed by the BoE in the consultation paper is a potential purchase limit of between 10,000 and 20,000 digital pounds per person. That limit, if introduced, would be designed to ensure the digital pound is not used for speculative reasons or interest earning.

Why would we need a digital pound?

This might be the most common question concerning this cash-like alternative and there are a few reasons why the BoE wants to implement it.

First, it has identified that digital innovation is changing the way we pay for things thanks to cards, apps and digital wallet payment systems. Any payments made by those methods are actually payments made in private money (issued by commercial banks) rather than public money (issued by a central banks). A digital pound would capitalise on the interest in technology to make public money a bigger proportion of overall monetary use, which has the corollary benefit of being financially ‘risk-free’ in the sense that there is no credit, market or liquidity risk.

Second, interest in CBDCs in other countries, most notably the US, EU and China, may have also prompted the UK government to embrace these trends. Countries that have greater control over currency and monetary transactions have greater power over what those transactions are for and can, in theory, make small changes to the features of the currency as a way of controlling economic policy.

Finally, the digital pound would potentially offer faster and cheaper payments with the added level of security. As with most CBDCs, the digital pound is also supposed to reduce the cost of cross-border transactions by eliminating a middleman and, as a result, making it more accessible to people all around the world.

Yet notwithstanding the potential benefits, the digital pound may also encounter a number of operational and legal difficulties, the most of which will be determined by the features and specifications of the currency. Since many of the digital pound’s technical features have not been agreed on yet and its release is not anticipated for another few years, we have limited our discussion to the potential legal implications.

Local regulation

The UK does not have a legal framework for CBDCs at the moment. However, the FCA has released a consultation paper in February 2023 on regulating stablecoins, including CBDC. It is too early to say how this regulatory regime will affect the digital pound issuance, but we can be certain that the UK government is working on implementing the framework that guards against risk and provides certainly to all users of the digital currency.

While this regime will be built to facilitate issuance of the digital pound by the BoE, some of the nuance of the rules will likely affect the private intermediaries dealing with or developing features for the digital pound and custody providers who would likely need to comply with the high-level regulatory outcomes and be specifically authorised by the FCA for those purposes.

Data privacy

Unlike many privately issued cryptocurrencies, the digital pound would not be anonymous. The Bank of England believes that this design will help prevent financial crime and provide the necessary level of security. While it’s still unclear which type of core ledger will be used for the digital pound, one thing we can be certain of is that it will be subject to rigorous privacy and data protection laws.

There are, however, some concerns about whether the current data protection regime is compatible with distributed ledgers, specifically those that prohibit deletion of personal data and identification of a data controller. Hence, depending on the digital pound design, some changes to the current data protection laws might need to be implemented to ensure they both can co-exist.

International regulation

As mentioned above, one of the benefits that the digital pound could bring is the ease and reduced cost in cross-border payments. Conversely, one of the main issues facing the digital pound is the lack of global consensus on the regulation and adoption of CBDCs. This has the potential to increase transaction and compliance costs for entities that accept or use the digital pound and increase the need for anti-money laundering controls.

However, this could also complicate and slow down the implementation process due to the lack of standardisation for the payment service providers. Even if the UK implements a legal framework for regulating CBDCs, the digital pound may not reach its full potential or desired ‘status’ (as not all jurisdictions recognise CBDCs as ‘currencies’) in isolation. Therefore, to create a robust international digital currency network, a global agreement on regulating and treating CBDCs needs to be reached.

The future of the digital pound

Recently, the House of Lords’ committee concluded that the risks of the digital pound (including the destabilisation of the banking industry, cybersecurity threats and privacy risks), overweigh its benefits. While the Lord’s rejection of the digital pound does not necessary indicate that it won’t see the light of day, it’s hard to say at this stage what the future for the digital pound holds. That being said, the Lords have recognised that the digital pound could revolutionise our payment system and the more mainstream CBDCs become, the more likely the UK will be induced to implement one too.

While there are a lot of unknowns surrounding the digital pound and its fate remains undecided, one thing is very clear – a robust legal framework regulating CBDCs, including the ‘Britcoin’, must be implemented first to ensure their users get the maximum reward with minimal risk, rather than vice versa.

Yuliya Prokopyshyn is a solicitor at Stephenson Law Stephenson.law