A Digital Pound: The Bank of England January 2025 Update

For some time now, the Bank of England (BoE) and HM Treasury have been examining the concept of a digital pound. It is envisaged that a digital pound would (i) be a central bank digital currency (CBDC) issued by the BoE (ii) complement physical banknotes and (iii) be exchangeable with cash and bank deposits. No decision has yet been made on whether a digital pound will come to fruition.

On 14 January 2025, the BoE published a progress update (the Update) summarising its work this past year on the digital pound as it relates to the evolving UK payments landscape. In this article, we outline the key implications of and action points arising from the Update.  

Legislation and Privacy

Any introduction of a digital pound would require UK Parliamentary approval and primary legislation. It is widely accepted that at the centre of this legislation should be a strong emphasis on safeguarding user privacy and ensuring that the BoE and UK Government cannot access personal spending data. Should it materialise, businesses looking to engage with the digital pound would, amongst other things, need to be alive to these privacy risks and update their internal systems and policies accordingly.

Public Consultation

There will doubtless be further opportunities for the industry to inform the development of the digital pound: further public consultation will precede the introduction of any primary legislation.

Retail Payments and Money

The BoE's desired outcomes for retail payments emphasise convenience, confidence, innovation, resilience, and effective governance. A digital pound could support these outcomes by providing a new payment option that is interoperable with existing systems.

National Payments Vision

The digital pound is part of the broader National Payments Vision (NPV), which aims to create a world-leading payments ecosystem with diverse payment methods. Pursuant to the NPV, the Update includes plans to establish a Payments Vision Delivery Committee to provide regulatory co-ordination and establish a means by which prioritisation decisions on payments initiatives can be reached.

Design Phase Workstreams

The BoE and HM Treasury are in the design phase of developing a digital pound. Much of this phase will take place in what is termed the ‘Digital Pound Lab’ (see the relevant sub-header below for further detail), which will coordinate four interconnected workstreams:

Experiments and Proofs of Concept

Testing technological feasibility with private sector partners.

Blueprint

Developing a comprehensive model for the digital pound.

National Conversation

Engaging stakeholders to incorporate diverse views.

Assessment

Evaluating costs and benefits to inform the decision-making process.

Public-Private Platform

The digital pound would act as a public platform for private innovation, allowing private firms to develop user-friendly services on top of the infrastructure provided by the BoE. This model is intended to allow public authorities to deliver resilient infrastructure, while private innovators address user needs and identify commercial use cases. The BoE’s principal aim is to prevent closed systems which restrict consumer choice and undermine interoperability.

Experiments and Proofs of Concept

The BoE has been conducting trials to understand the feasibility and design options for a digital pound, including Application Programming Interfaces (APIs), e-commerce, offline capabilities, and point of sale integration. These experiments have included:

• developing APIs;
• exploring offline transactions with the digital pound, focusing on preventing double-spending and ensuring anti-money laundering (AML) compliance (considering account-based (i.e. akin to a traditional bank account) and token-based (i.e. akin to physical cash) solutions);
• investigating the integration of the digital pound with existing Point of Sale (POS) systems; and
• researching privacy-enhancing technologies. 

The BoE stated that its evaluation of various ledger technologies and architectures, including relational databases, and distributed ledger technologies (DLTs) (e.g. blockchain technology) would be critical to the decision to proceed with a digital pound.

Assessment Framework

An assessment framework will evaluate the digital pound against statutory and policy objectives, safety and resilience, financial viability, and alignment with global and domestic contexts. The BoE and HM Treasury have committed to publishing a paper detailing the decision made as a result of the assessment along with its rationale in due course.

Stakeholder Engagement

The BoE has reiterated that stakeholder engagement is crucial to shaping the digital pound's design and assessment. However, given the technical nature of the design phase, the BoE’s primary engagement at this stage is with specialist stakeholders.

Future Steps

The Update sets out three next steps:

Design notes

The BoE will begin publishing design notes outlining its initial thinking on aspects of a digital pound, thereby harnessing external expertise throughout the process. The Blueprint Framework, published on 14 January 2025, represented the first of these design notes.

Digital Pound Lab

The BoE intends to launch the Digital Pound Lab later in 2025. This sandbox environment will enable hands-on experimentation to test (i) API functionality (ii) innovative use cases and (iii) potential business models for payment interface providers (PIPs) and external service interface providers (ESIPs).

Forums

While the BoE forum to engage stakeholders and gather strategic input (the CBDC Engagement Forum) and jointly run HM Treasury and BoE group for expert advice (the Academic Advisory Group) will continue, the BoE intends to wind down the former ‘Technology Forum’. Technology-focused engagement will continue, albeit in a more “direct and detailed” form supported by the Digital Pound Lab.

Anticipated Benefits for the UK Fintech Sector

The exploration of a digital pound is expected to benefit the UK's fintech sector in several ways, including by:

Fostering innovation

The digital pound design phase is likely to provide fertile ground for further innovation.  

Underpinning new business models

The public-private platform model, in particular, is likely to yield new commercial applications for digital assets.

Increasing UK fintech visibility

The visibility of the UK fintech sector is set to increase, thereby opening up new business opportunities for UK-based firms.

Enhancing financial inclusion

The BoE hopes that expanding access to financial services will, in turn, improve economic outcomes and drive economic participation.

The Update concludes by reiterating the BoE's commitment to a collaborative approach and the intention to keep stakeholders informed as the project progresses.

Regardless of whether it is eventually adopted, the digital pound design phase promises lasting benefits for the UK payments ecosystem.

Let’s talk

For advice on digital assets, please contact the Charles Russell Speechlys Partners, Racheal Muldoon, Charlotte Hill, Richard Ellis and Nick White.