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Coming Soon: The Official Cryptocurrency of the UK

bitcoin depot

Britain is the latest country to join a global race toward central bank digital currencies (CBDC). In a statement, the Bank of England said the currency would be a new form of digital money issued by the Bank of England. It will be used by households and businesses and exist alongside cash and bank deposits rather than replacing them.


The U.K. government is yet to decide whether to introduce a digital version of the British pound but said it would explore the objectives, use cases, opportunities, and risks involved if it were to proceed. The Bank of England will also set up a unit within the institution dedicated to exploring a central bank's digital currency.


"We're launching a new task force between the Treasury and the Bank of England to coordinate exploratory work on a potential central bank digital currency," U.K. Finance Minister Rishi Sunak said at a fintech industry conference in April.


Later, Sunak responded with the word 'Britcoin' to a post on Twitter from the Ministry of Finance and thereby, confirmed the initiative.


If a CBDC was to be introduced, it would most likely be denominated in pounds sterling, just like banknotes. As a result, £10 of CBDC would always be worth the same as a £10 note.


CBDC is sometimes thought of as equivalent to a digital banknote, although in some respects, it may have as much in common with a bank deposit. Any CBDC would be introduced alongside – rather than replacing – cash and bank deposits.


Central Bank Digital Currency (CBDC)

A central bank digital currency (CBDC) uses an electronic record or digital token to represent the virtual form of a fiat currency of a particular nation (or region). A CBDC is centralized; it is issued and regulated by the competent monetary authority of the country.


Central bank digital currency is also called digital fiat currency or digital base money. 


Bitcoin directly inspired the present concept of CBDCs. Still, a CBDC is different from virtual currency and cryptocurrency. These two are not issued by a state (decentralized) and lack the legal tender status declared by the government. 


CBDC implementations will likely not need or use any distributed ledger such as a blockchain. CBDC is also more like a stablecoin because it's not volatile and does not increase or decrease in value.


How are CBDCs different from cryptocurrencies?

CBDCs are very early-stage, so it’s murky what features they’ll end up having – that is if they are ever rolled out.


In many cases, a CBDC is like a hybrid of Bitcoin and a government-issued currency. The resulting CBDC creature pulls in attributes of each, and specific features can include the following:


Distributed Ledger Technology (DLT)

We live in a digital world, and our money is primarily digital to begin with. We use apps on our smartphones to check our balances. We use credit cards to make payments. So how is a CBDC different?


CBDCs are digital but with different technological makeup. They are generally proposed to reengineer money from the ground up, with many borrowing from Bitcoin’s underlying technology with distributed ledger technology (DLT). 


To keep track of money, banks need to store financial records, such as how much money a person has and what transactions they’ve made in a ledger. This is the foundation of how you can use any bank's ATM to withdraw cash, just like you can do with your cryptocurrency using a Bitcoin ATM.


Instead of one central database storing all people's financial records, DLT is composed of several copies of this transaction history. Each is stored and managed by a separate economic entity and usually collected from the top by the country’s central bank. These financial entities share DLT in a distributed manner. 


This is known as a permissionless blockchain because only a select few entities can access or alter the blockchain. In addition, central entities control who gets access to the blockchain and what they can do with it. For instance, the main entity might decide that Alice can only read the blockchain, while Bob can modify and read the blockchain. 


This sits in contrast to a permissionless blockchain, such as Bitcoin, which allows anyone to run the software and participate in sending transactions on the network. No central entity can turn users away.


Centralized

There’s a reason CBDCs choose this permission blockchain. Though DLT has some similarities with bitcoin and other cryptocurrencies, the goals are very different. 


Bitcoin and other public blockchains like Ethereum are unique in that no central entity or group of entities (as is the case with DLT) is in charge. That’s typically not a property that sits well with governments. 


Governments are choosing DLT technology because they can still retain control over certain aspects such as:

The supply — Bitcoin has a limit of 21 million bitcoins built into the protocol, and it is very hard, perhaps impossible, to change this limit. In contrast, governments each have a central bank, which is in charge of the country's money supply. These powerful banks choose when to remove or add money to the pool, such as to stimulate the economy in troubled times and set national interest rates, among other tasks. These roles aren't going to change with CBDCs.

Who runs it — A central entity will choose which financial entities participate in managing the distributed ledger. This differs from Bitcoin, which allows anyone to run the software, without permission.


Lower costs and higher efficiency

Advocates claim that because CBDCs are structured under the hood, they could lead to lower costs for transferring money. The idea is that with a CBDC, financial entities are more connected, making a smoother way to move money around than the disjointed financial system that’s in place today.


Tracking payments 

DLTs give a complete record of all the transactions. Some governments, such as China, known for its extensive surveillance apparatus, will potentially want to use this financial information to keep tighter tabs on its citizens.


Different governments are leaning toward other policies in this respect. For example, in the U.S, The Federal Reserve Bank seems more eager to preserve the privacy of U.S. citizens in case it adopts a CBDC.


The TL;DR (Too Long; Didn't Read) 

What is "Britcoin"?

It's a potential digital currency that would be backed by the Bank of England. 


How is it different from Bitcoin?

Bitcoin and other cryptocurrencies are not backed by a 'real' currency or an asset. Bitcoin would be tied to the pound. 


What is the point?

Cryptocurrencies are increasingly popular but their value can be volatile and they are not accepted widely for payments. 


Bitcoin would be overseen by the Bank of England and would be the same as a banknote but in digital form.

July 9, 2021