Digital Pounds - Part 6: International Consequences

HMT and BoE recently launched a consultation on their proposal to introduce a Central Bank Digital Currency, the Digital Pound. Parts 1 and 2 of this series explore the case in favour of implementation, whilst Parts 3, 4 and 5 discuss challenges which still need resolving. This part takes a different approach, looking beyond the UK. 

International Impacts

I recently listened to former BoE Deputy Governor Paul Tucker discuss his new book on the Macro Musings podcast. During the show he highlights a fact that central bankers have not always been keen to heed: all monetary policy is also foreign policy. Whilst he was referring especially to swap lines with emerging economies like India, similar considerations surely apply to a Digital Pound which is accessible to foreign nationals. The diplomatic impacts are far beyond my experience, it would be interesting — essential, in my opinion — for them to be considered thoroughly before progressing with the project. 

A few potential impacts stand out: 

• Would the Digital Pound take off in any other (commonwealth?) countries for retail transactions? Applications such as M-PESA in East Africa show there is a strong appetite for digital money in these countries. When faced with volatile domestic currencies, individuals and businesses may choose instead to use what is effectively sterling instead. 
• Would this be a desirable policy outcome? Trade links with the UK would surely be strengthened as a result, in a way that the US is benefitted by the dollar's role in global trade. 
• Would other major central banks (Fed, BoC, ECB) be forced to respond if the Digital Pound was successful, to position themselves to be a global digital currency? If one of these banks moves first can the UK really resist responding? 
• Would a Digital Pound, open to foreign nationals, facilitate capital outflows from those countries in times of stress as individuals and businesses opt to buy GBP instead, and to do so outside of their own country’s financial system? How will governments who need (or wish) to impose capital controls react to the UK facilitating cross border payments in this way? 

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This is Part 6 of a submission in response to HMT’s and BoE’s public consultation. To continue reading Part 7 click here. The further parts are available here.

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