Mark Tencaten - How the digital pound might interact with cryptocurrencies

The UK has developed a strategy for a central bank digital currency, like many other nations. A digital pound will function as a regular online payment method. Although it wouldn't pay interest like a typical savings account (or even certain current accounts), it might make financial services more widely available in the Nation.

Recently, the Bank of England put up a fundamental framework for the operation of a digital pound. A bold schedule for launching one by 2025 has been proposed.

The viability of a UK CBDC, according to Mark Tencaten, would largely depend on whether the advantages of providing a digital currency offset the expenses of developing and implementing the infrastructure necessary for supporting the new payment system.

CBDCs have definite advantages, such as promoting financial inclusion by making it simpler for the 1.2 million unbanked citizens of the UK to sign up for banking services. The government could also utilize the online wallets that will store people's digital pounds to make "fiscal transfers" like giving tax breaks or assistance payments to people's homes and companies.

But, the present proposal from the Bank of England also poses some questions concerning a digital pound. Especially how (or whether) it may interact with other digital currencies like cryptocurrency assets. Although the bank offers a number of models, in general, this could assist lower systemic risk in the cryptocurrency industry and broaden the range of banking options available to UK clients.

Stablecoins are particularly mentioned in the CBDC consultation document from the Bank of England. In contrast to traditional currency, which the government issues, private corporations create and distribute digital assets. A stablecoin's value is tied to a reliable asset, such as the US dollar or British pound, unlike other digital currencies like bitcoin. But what about the British virtual pound?

Why could stablecoins be a good addition to digital pounds?

Mark Tencaten discusses how a stablecoin and a digital pound have certain similarities. They could "coexist" in a hybrid payments economy. It compares to how we currently utilize bank accounts and cash in the same payment system and highlights how technological advancements like ATMs have made this coexistence even simpler over time.

Mark Tencaten also states that to support a digital pound, stablecoins would need to be "completely supported with high-quality and liquid assets ."Additionally, it offers a scenario in which these underlying assets may be "kept exclusively with the central bank," saying that doing so would enable the stablecoin to be "economically identical to the digital pound" and lower financial risk.

If a stablecoin was backed by digital currency, the issuer would issue holders stablecoin tokens according to the worth of digital pounds, which holders could use for domestic and international payments as well as cryptocurrency trading. These private currencies would function on the blockchain that facilitates and lowers the cost of payments. Stablecoins are already being utilized in several nations as a hedge against rising prices and macroeconomic unpredictability.

The control of cryptocurrency

The crypto sector may gain from this as well. Unregulated, unaudited private banks and organizations currently control stablecoins. Yet, a stablecoin supported by a digital pound kept in a central bank account would be considerably more transparent and reliable. The central bank could periodically audit the reserves of stablecoin providers. Lawmakers may also impose capital restrictions, such as a requirement that a certain proportion of issuers' reserves be maintained in an account with the banking system.

Extreme capital needs, however, may have a negative impact on stablecoin viability. They can profit from their holdings or the assets stored against the stablecoins they issue, as they are often tied to interest-bearing commodities like Treasury bonds.

In contrast, a stablecoin issuer that is backed by the digital pound is unlikely to see interest on its central bank account. It seems improbable that the Bank of England would grant a stablecoin provider the same type of account. This would mean adhering to the same rules, which might have an impact on the freedom that cryptocurrency asset producers prefer.

There is little question that stablecoins supported by a digital currency kept at the central bank could help with some of the systemic problems associated with this kind of crypto asset. A significant stablecoin's value has fallen dramatically over the past year. This often occurs when a market incident leads investors to quickly sell their holdings, and the issuer has trouble handling the large volume of simultaneous redemptions.

It would be possible to conduct redemptions and withdrawals while preserving the coin's value relative to the virtual pound if issuers held a specific proportion of liquid digital currency deposits at the central bank. A central bank might offer insurance to stablecoin users to preserve their holdings to a certain extent, even in issuer insolvency.

In his conclusion, Mark Tencaten says that similar to cash and bank accounts, it's conceivable that stablecoins and digital assets can coexist and benefit one another. A digital pound might also highlight the expanding importance of individual money in the economy. This would promote financial inclusion while also assisting in making the financial institution safer.