What is the digital pound, and does the UK need it?

The way we use money in the United Kingdom is changing, bringing opportunities and new considerations for public policy.

A UK central bank digital currency – a ‘digital pound’ – would be a new form of digital currency, sitting alongside, rather than replacing, cash.  

While a final decision is yet to be made about whether a digital pound is needed in the UK, the Bank of England (BoE) and HM Treasury have established an Academic Advisory Group (AAG) to support the design phase.

Professor Darren Duxbury, a behavioural finance expert at Newcastle University and member of the AAG, discusses what it is, and why it might be needed. 

What is the digital pound? 

Central bank digital currency (CBDC) is digital money issued by a country’s central bank, The digital pound would be issued by the Bank of England, alongside cash. It would represent a new type of money denominated in sterling and with a stable value, just like physical cash (banknotes and coins).  

The digital pound would be accessible through digital wallets and used for day-to-day transactions, be that in-store or online. The intention is not for it to replace cash, but rather to supplement it, and be an electronic alternative that is riskless and universally accepted.

Do we need a digital pound?

The BoE and HM Treasury identify a number of motivations underpinning interest in the potential introduction of the digital pound.  

Central to this is the decline in the use of cash. Since 2017, cash use in the UK has declined by around 15% each year (UK Finance, 2023). Nevertheless, cash remains the second most frequently-used payment method in the UK, accounting for 15% of all payments in 2021.

Motivations and risks 

Primary motivations for the digital pound are the availability of central bank money as an anchor for confidence and safety in money, and promoting innovation, choice, and efficiency in payments.  

Whilst there are societal and economic benefits to the digital pound, potential risks have also been voiced. The House of Commons Treasury Committee, for example, note it could bring new risks and challenges, including risks to financial stability if consumers en masse were to switch bank deposits into digital pounds during periods of financial market stress.   

There are also concerns about financial inclusion, which could suffer if the digital pound were to accelerate the decline of cash, causing potential difficulties for those reliant on physical cash.

Wide-scale adoption: the key to success 

The BoE see the digital pound as replicating the role of physical cash in a highly digitalised economy. Ultimately, its success will depend on its wide-scale adoption. 

To provide insight into the likely speed and scale of adoption of the digital pound, we will need to understand more about the behavioural drivers of individuals’ payment method intentions and choices.  

Behavioural insight and the design phase of the digital pound 

Research I recently led with NatWest Bank showed that there is compelling evidence that behavioural factors, including an individual’s propensity for habitual behaviour and their level of financial literacy, influence intentions to choose physical cash over electronic forms of payment. 

We also found that a person’s response to exogenous shocks such as a change in economic circumstances, or security breaches, demonstrates that such intentions are not immune to change.

In related work, we examined the role of behavioural drivers in the decision to adopt new payment technology in its early stages. We used UK survey data collected at a time when contactless payments were on the rise but not yet fully adopted, to examine the role of consumers’ financial literacy and habitual behaviours as drivers of contactless payment ownership. This unique timing allowed us to identify a segment of the population without contactless card ownership- a rare opportunity given the current widespread adoption of the technology. 

Above and beyond socio-economic factors, we found that debit and credit contactless card ownership were associated with financial literacy, while routine-oriented habitual behaviour only affected ownership of contactless debit cards. Our findings provide unique insights of particular relevance for future technologies, like the digital pound, facing early-stage adoption challenges.

Findings and insights from this research were presented at the March 2024 meeting of the CBDC AAG. As a member of the CBDC AAG, such behavioural insight will likely play a key role in the design phase of the digital pound and will prove essential in accurately forecasting its take-up in the UK. 

A version of this blog post was first published in North East Times Magazine in March 2024. View the article.

You might also like 

• learn more about Prof. Darren Duxbury, Chair in Finance, Newcastle Business School and read about his appointment to the CBDC Academic Advisory Group 
• read Behavioural drivers of intentions to use cash, Prof Duxbury’s blog for Chartered Banker 
• read The digital pound: a new form of money for households and businesses?, a consultation paper from Bank of England and HM Treasury 
• visit the Newcastle University Business School website and explore more of its research