A UK central bank digital currency (CBDC) has the potential to help overcome financial exclusion and alleviate poverty, according to speakers at a webinar convened by the Digital Pound Foundation.
The ‘How could a digital pound facilitate financial inclusion?’ discussion was held as governments and central banks worldwide grapple with the public policy and technical opportunities and obstacles surrounding the introduction of a CBDC. A decision has yet to be made on whether to introduce a CBDC in the UK, putting the country in the same position as most major nations.
A UK CBDC – should it get the go-ahead – has been described as constituting a ‘major national infrastructure project’. A consultation into a potential digital pound is expected later this year and the earliest issuance date would be in the ‘second half of the decade’ – so, after 2025.
The Bank of England published five ‘core principles’ forming the backbone of its CBDC explorations last year, including that financial inclusion should be a prominent consideration in a potential CBDC’s design. But financial inclusion as a motivation to issue a CBDC is typically given significantly greater prominence in developing countries with large unbanked populations. In contrast, interest in CBDCs in advanced economies such as the UK appears driven mainly by payments efficiency and financial stability considerations.
The DPF’s panellists sought to emphasise the UK’s financial inclusion challenge – there are more than one million unbanked in the nation of about 67 million people, according to a ‘Financial Lives’ survey published by the Financial Conduct Authority last year – and how a CBDC could help. “It’s not just an ‘African problem’ or ‘southern hemisphere’ problem,” said Sofie Blakstad, chief executive of hiveonline, a finance platform supporting unbanked entrepreneurs.
“In the UK, the average annual cost of just being unbanked is £2,500 – and that’s pre-pandemic data,” said Victoria Thompson, co-founder of fintech company Orora. “If you want to talk about really putting money back into people’s wallets, literally getting them included into the financial system would make a massive difference”.
CBDCs ‘could remove the poverty premium’
There is a high correlation between the unbanked and poverty. More than one in five of the UK population (22 per cent) – 14.5 million people – live in poverty, according to the Joseph Rowntree Foundation. “With CBDCs we could actually remove the poverty premium in the UK really quickly,” Thompson told the 19 May online audience – a reference to people in poverty or in low-income households often paying more for the same goods or services than those who are financially better off.
She criticised the fact that government agencies often turn to prepaid card programmes to disburse payments: “An insane amount of money is distributed in aid through prepaid cards and a lot of people are stuck in a world of prepaid cards. If we design a CBDC in the right way, we can create an infrastructure which is better for that segment of the market.”
In terms of CBDC design, Thompson focused on the issue of digital identity. “In the way it works right now, one of the biggest barriers is our approach to the rules and regulations around opening an account. If we [the UK] had a digital ID scheme, this would enable people to get into the banking system.”
Blakstad brought up the issue of know-your-customer (KYC) regulation in the context of CBDC design. “It’s a really difficult question for regulators because there is a sliding scale between complete openness and not including anyone.” Allowing anyone to participate would basically mean ‘no KYC’ and “making it easy for criminals or terrorists”. When deciding on CBDC design architecture, the question of whether it would be issued through the commercial banking system or more broadly through fintechs would need to be answered. “If it’s going to be through the commercial banking system, then banks will want to perform the high grade of KYC and AML [anti-money laundering checks] that they do today, whereas fintechs may be able to lower the barrier a bit more, as we’ve seen with M-Pesa in Kenya, the first real widespread digital currency.” Launched 15 years ago, M-Pesa allows users to store and transfer money through their mobile phones.
Blakstad also mentioned the Bahamas ‘Sand Dollar’, which became the first fully deployed digital version of a country’s fiat currency when it launched in October 2020. “They’ve [the Bahamas] got a sliding scale of how much you can access based on the level of identity that you can provide. I think that’s a practical and quite elegant solution,” she said, adding: “Rather than having a bar that people have to jump over, we lower the bar to the point where nobody has to jump. But then we restrict the amount of services that they can access based on the level of risk associated with the level of identity.”
International learning important
Helen Disney, who moderated the webinar on behalf of the Digital Pound Foundation, spoke of international collaboration on policy as an important subject that often is neglected when discussing CBDCs. “Sometimes we don’t actually share best practices between different countries. If we did, we would probably save a lot of heartache, money and time by actually designing things in the right way from the outset,” she said.
Disney also mentioned the importance of trust in financial services. “The role of a central bank is to provide trust and we still need that trust function in order to be able to interact in certain activities. I’m not sure I’d want welfare payments necessarily paid in a cryptocurrency where they might suddenly be worth 50 per cent more or less the next day,” she said – a reference to the growth in popularity of decentralised digital currencies (and whose rise is part of the reason why state authorities are considering CBDCs).
Digital wallets could additionally create more financial inclusion by accepting people who have declared bankruptcy in order for them to rebuild their credit history, Disney added.
“Someone who’s been declared bankrupt should absolutely get access to a CBDC wallet because it’s not a loan facility. It’s just a wallet that stores value,” said Richard Ells, founder and chief executive of Electroneum, a UK-based company that enables people to earn cryptocurrency online without the need for a bank account.
In Ells’ opinion, the BoE is more likely to “do [CBDC] right” than other central banks. “There are lots of [other countries’ CBDC] projects that have already launched and they have largely been rushed to market,” he said.
Build ‘smart’ architecture
Discussion during the webinar also looked at the broader benefits of a CBDC for government and public authorities.
Building a “smart architecture around how money and value move around the system makes tremendous sense”, Thompson said, explaining that it would be easier to track money flows.
“I think we could all do with a little bit more transparency in government and this is something that’s really important in the design of a CBDC,” she said.
Ells added that a CBDC would give the BoE real-time feedback on how money is being spent and stored. “We’re talking about retail, as well as corporate, as well as intrabank use. You’ve got data that’s going back to the Bank of England that they just haven’t known before. Currently they don’t know what people are doing with the money until quite a long time afterwards when reports would be created,” he said.
Susan Friedman, head of policy at blockchain-based digital payment network Ripple, emphasised the importance of public consultations to not only engage the public but also “legitimise” the idea of a CBDC.
“Once you have that stamp of approval and start to put the framework in place, you start to figure out how to achieve that sliding scale and continue to make the conversation as inclusive as possible so that you hear from the people who this affects,” she said.
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‘CBDCs’ financial inclusion potential examined in World Bank/BIS paper’ – our news story (20 April 2022) on a paper, ‘Central bank digital currencies: a new tool in the financial inclusion toolkit?’, authored by staff from the World Bank Group and Bank for International Settlements after interviewing nine central banks at various stages of implementing or exploring retail CBDCs
‘Digital pound’s potential benefits ‘overstated’, say UK Lords’ – our news story (24 January 2022) on a House of Lords report describing the potential benefits of a British CBDC as ‘overstated or achievable through less risky alternatives’
‘UK to consult on potential digital pound in 2022’ – our news story (15 November 2021) on HM Treasury and the BoE announcing the planned CBDC consultation
‘Prepare for ‘Britcoin’? Bank of England and HM Treasury launch CBDC taskforce’ – our news story (19 April 2021) on the setting up of a BoE/HMT taskforce to ‘co-ordinate the exploration’ of a potential digital pound