The UK government and key financial regulators are increasingly favoring Central Bank Digital Currencies (CBDCs) over private cryptocurrencies like Bitcoin and Ether. In recent consultations ahead of the government’s upcoming discussion paper on the matter, the consensus among experts is that CBDCs provide similar benefits to private cryptos but with greater safety and fewer risks.

Key Points from the Consultation:

1. CBDC’s Superiority Over Cryptos:

Officials argue that CBDCs can perform all the functions that cryptocurrencies do but with added regulatory oversight and without the inherent risks associated with private cryptos. These include concerns about volatility, security, and the speculative nature of assets like Bitcoin and Ether. Even stablecoins, pegged to real assets such as gold, are viewed with skepticism by regulators due to concerns over their stability.

2. Blockchain’s Broader Potential:

While private cryptocurrencies are under scrutiny, blockchain technology itself is not being dismissed. Experts highlight the potential of blockchain for socially beneficial applications like the tokenization of government securities, delivering targeted subsidies, and ensuring end-use credit for vulnerable populations.

3. Financial Inclusion via CBDC:

The Governor of the Bank of England emphasized the programmability of CBDCs as a crucial feature to enhance financial inclusion. For example, the ability to program the digital pound could ensure that funds reach the intended recipients in government benefits programs.

4. Pilot Projects and Expanding Scope:

The UK's CBDC, the digital pound, has already been introduced in both wholesale and retail segments, with over 5 million users in the retail pilot as of late 2023. Pilot programs, such as the Bank of England's project, are testing the CBDC’s use in targeted agricultural lending. The government is expected to expand CBDC’s usage after reviewing data from these pilots.

5. G20 and International Guidelines:

The UK's stance on cryptocurrencies aligns with the G20’s adoption of the IMF and Financial Stability Board’s synthesis paper, which advocates for robust regulations. While it proposes a minimum threshold for regulatory oversight, it also allows nations to impose stricter measures, including outright bans on private cryptos if deemed necessary.

Why CBDCs Over Cryptos?

CBDCs are seen as more secure and controlled forms of digital currency, offering:

- Regulation: Clear oversight by central banks, reducing risks like money laundering or terrorism financing.

- Stability: Backed by the government, CBDCs avoid the extreme volatility seen in private cryptos.

- Financial Inclusion: The programmability of CBDCs can ensure funds are delivered directly to those who need them, supporting economic development goals.

In contrast, private cryptocurrencies are viewed as speculative and prone to risks that undermine their utility for broader economic purposes. The government’s final decision on the matter will come after further consultation, but the direction is clear: CBDCs, like the digital pound, are poised to play a central role in the UK's digital financial future.

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